Bank of Canada Governor Mark Carney said his quarterly economic forecast next week will reflect a prolonged global recovery, suggesting he may reduce his outlook and delay raising policy interest rates.
Global demand is being curtailed due to uncertainty created by the 19 crisis meetings of euro-zone leaders over the past two years, Carney said, and by the impending so-called fiscal cliff -- the $607 billion in U.S. spending cuts and tax increases scheduled to take effect in January unless the U.S. Congress acts.
The central bank’s new forecast “will take into account the impact of the uncertainty,” Carney said in a speech today in Nanaimo, British Columbia. He has said since April that tighter policy “may become appropriate” as the economy moves toward full output, a phrase he didn’t use today.
Canada’s dollar erased gains after Carney’s remarks, his last scheduled public appearance before the Oct. 23 interest- rate decision and full economic forecast a day later. Canada’s key interest rate has been at 1 percent for two years, the longest pause since the 1950s.
“I would expect slight downgrades in their forecasts,” next week, said Francis Fong, an economist in Toronto at Toronto-Dominion Bank. (TD) “Their bias I suspect would remain in a wait-and-see approach.”
The Canadian dollar closed little changed at 98.07 cents per U.S. dollar in Toronto, after earlier rising as much as 0.3 percent. Yields on two-year benchmark government bonds fell 6 basis points to 1.08 percent.
“Elevated global uncertainty is holding back global economic growth and, thus, the demand for Canadian exports,” Carney said today. “There is some evidence that global uncertainty is affecting domestic activity.”
The central bank is also tracking the Canadian dollar’s strength when setting policy, Carney said. The currency has been boosted by global capital inflows that are “a headwind to the Canadian economy,” while foreign asset purchases have supported domestic growth by lowering longer-term interest rates, he said. “In this uncertain world, then, Canada is rightly viewed as an attractive investment destination,” Carney said.
In response to a question from the audience about the currency strength, Carney said, “we have seen evidence of firms taking advantage of that” to purchase productivity-enhancing machinery and equipment, and that “we have a sustained need as a country to continue that investment.”
Finance chiefs left last weekend’s International Monetary Fund and World Bank annual meetings in Tokyo at odds over how to address signs of slowing growth in emerging-market economies that threatens the global recovery, along with Europe’s debt crisis. South Korea’s central bank chief urged Asia to add stimulus as Russia and Brazil called on rich nations to address their own challenges.
“The speech is making clear the situation could have a material revision down on growth if this isn’t fixed,” said Paul Ferley, assistant chief economist at Royal Bank of Canada in Toronto. The central bank may drop its inclination to raise rates, he said.
Earlier today, the central bank released a survey that showed Canadian businesses curbed their expectations for sales growth, investment and hiring over the next year on signs of weaker global demand.
The Bank of Canada would be transparent if there were a need to address record consumer debt loads, Carney said.
“If we were to lean against emerging imbalances in household debt, we would clearly declare we are doing so and indicate how long we expect it would take for inflation to return to the 2 percent target,” Carney said.
Household debt compared with disposable income jumped to a record 165.8 percent in the second quarter, Statistics Canada said today after revising data back to 1990, and revising the country’s national accounts data for three decades.
The revisions are “relatively minor,” Carney told reporters after the speech. The bank’s report next week will “update our views of potential growth in Canada and obviously our views on the output gap as a consequence of both of those revisions and our views on potential and bring that as one element of our outlook for growth and inflation in Canada.”
Regarding the country’s housing market, Carney told reporters the bank has been expecting a slowing “and we are seeing signs of that.”
“We continue to watch the situation along with others very closely,” he said.