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Carney May Drop G-7’s Last Rate Rise Bias as World Demand Fades

The Bank of Canada may drop its bias for raising interest rates as a slowing global economy reduces demand for the nation’s exports such as metals and fertilizer, ending its outlier status among the Group of Seven.

Policy makers led by Governor Mark Carney may also cut their economic forecasts and will keep the benchmark rate on overnight loans between commercial banks at 1 percent in the 9 a.m. decision from Ottawa, according to all 26 economists in a Bloomberg News survey.

Canada is facing some severe headwinds,” said Krishen Rangasamy, senior economist at National Bank Financial in Montreal. “They could actually remove the tightening bias altogether, which I would argue is the right thing to do.”

The central bank said “some modest withdrawal of the present considerable monetary policy stimulus may become appropriate” at its last rate announcement on Sept. 5, repeating wording it has used since April. Over the following six weeks, Canada reported a fifth straight monthly trade deficit and the bank’s preferred measure of core inflation averaged an annual 1.5 percent pace in the third quarter, slower than a July forecast of 1.9 percent.

Carney failed to repeat the language about withdrawing stimulus in his Oct. 15 speech, when he said Canada’s exports and investment are being curbed by confusion about the policies U.S. and European authorities are following to sustain growth.

“The innuendo we have gotten from previous statements that there would be a hike and it could be soon, that will be weeded out,” said Carl Weinberg, chief economist at High Frequency Economics. “How could he do otherwise? There is nothing special about what’s going on in Canada.”

Export Reliance

Canada relies on exports for about a third of its gross domestic product, and the bank has termed the recovery in foreign trade the slowest since World War II. Those comments came in July, three months before the International Monetary Fund said there is an “alarmingly high” risk of a steeper global slowdown.

Among the obstacles to growth cited by Carney last week was the impact on business and investor confidence of the 19 crisis meetings of euro-zone leaders over the past two years as well as the impending “fiscal cliff” -- the $607 billion in U.S. spending cuts and tax increases scheduled to take effect in January unless the Congress acts.

The U.S. Federal Reserve announced a third round of asset purchases last month and extended the horizon for record-low interest rates through at least the middle of 2015. European Central Bank President Mario Draghi agreed last month to a program of unlimited bond-purchases to fight speculation of a currency breakup.

New Forecast

The bank’s statement will probably contain highlights of the updated economic forecast that will be published Oct. 24. The new forecast “will take into account the impact of the uncertainty,” Carney said in the speech last week in Nanaimo, British Columbia.

The economy will probably grow at a 1.9 percent annualized pace in the fourth quarter of this year, and by 2.1 percent in 2013 according to a Bloomberg economist survey. The central bank’s last outlook, in July, forecast figures of 2.3 percent for both periods.

“Up to now we have been a real outperformer,” said Roland Chalupka, a Toronto-based chief investment officer who oversees C$800 million of assets at Fiduciary Trust Company of Canada, a subsidiary of the U.S. investment firm Franklin Templeton Investments. “Even Mark Carney has acknowledged that all major economies, even a major economy like Canada, can’t go on unaffected by a global slowdown.”

Swaps Trading

Carney may not raise his key rate, which has been 1 percent for more than two years, until the third quarter of 2013 according to the economist survey. Trading in overnight index swaps show some investors are betting on rate cuts next year.

Companies such as Potash Corp. (POT) of Saskatchewan Inc. are showing the strains of the global slowdown. Potash on Oct. 17 forecast full-year profit below analysts’ estimates after delays in supply contracts in China and India reduced sales of the fertilizer. The company will halt production at two mines for about eight weeks.

Still, Canada’s economy remains close enough to full output that Carney may opt to modify his language about rate increases instead of cutting it, said Avery Shenfeld, chief economist at CIBC World Markets in Toronto.

“If the Bank dropped that message in its entirety, it would leave investors guessing whether the next move was even a hike,” Shenfeld said.

Job Market

One sign of strength is Canada’s job market, with a September job gain of 52,100 that was more than five times faster than economists predicted. Canadian unemployment in September was 7.4 percent, compared with 7.8 in the U.S., and has been below the U.S. rate for almost four years.

Keeping some language about higher rates could also help discourage new bets on cheaper loans that could add to what is already a record consumer debt burden, said Rangasamy at National Bank Financial.

“He’s held on to that bias to counter that, to show he’s not going to cut rates,” Rangasamy said. “For them to cut rates, it will take something bad to happen.”

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net

To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net; David Scanlan at dscanlan@bloomberg.net

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