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Carney ‘Caution’ Means Canada Pause as Fed Mulls More Stimulus

Bank of Canada Governor Mark Carney, who yesterday said economic growth has slowed more than he expected, may keep interest rates unchanged as long as his U.S. counterparts contemplate additional monetary stimulus.

“The unusual uncertainty surrounding the outlook warrants caution,” Carney, 45, said in Windsor, Ontario. “Any further reduction in monetary stimulus would need to be carefully considered” given risks of a renewed U.S. slowdown and cooling consumer spending in Canada.

The Bank of Canada may be wary of breaking away from the world’s major central banks on policy, even though the country is benefiting from rising demand global for commodities such as oil. The Bank of England last week signaled policy makers are moving closer to adding stimulus, and the Federal Reserve said Sept. 21 it’s prepared to further ease monetary policy if needed to support the recover.

“It’s a bit unseemly to hike through a phase of quantitative easing debate in the U.S.,” said Eric Lascelles, chief economics and rates strategist at Toronto-Dominion Bank’s TD Securities unit, referring to a possible resumption of large-scale asset purchases. He said Carney’s speech was “riddled with dovish comments.”

Carney is alone among Group of Seven central bankers to raise interest rates this year. The bank “would be reluctant to go in the opposite direction” of the Fed, said Lascelles, who expects a pause to last until March. “The cost of waiting is low.”

Limits to Divergence

“While Canada’s circumstances and the discipline of the inflation target dictate a different policy stance than in the United States, there are limits to this divergence,” Carney said in his speech. The Bank of Canada has a 2 percent inflation target.

Carney is “telling market participants that your expectations for very low probability of us raising rates is correct,” Michael Gregory, a senior economist at BMO Capital Markets in Toronto, said in a telephone interview.

Canada’s economy can be expected to grow at a “modest pace” because of the effects of higher household debt levels and a slower global recovery, Carney said.

Growth is “more modest than we had expected and it will be more modest in the third and fourth quarters,” Carney told reporters following the speech, adding the bank “will put a finer point on that on Oct. 20 when we release our upcoming forecast,” referring to the next monetary policy report.

Paring Bets

The bank raised its policy interest rate a quarter point to 1 percent on Sept. 8, the third increase this year, and investors had been pricing in a strong likelihood as recently as two weeks ago of another rate increase this month. The bank’s next rate announcement is Oct. 19.

The chance of a quarter-point increase at the October meeting stood at 18 percent yesterday before the speech, down from 20 percent the day before and 40 percent two weeks ago, according to Bank of Nova Scotia data derived from overnight index swaps.

While Carney said the need for emergency measures has passed, “exceptionally stimulative” monetary policy is consistent with achieving the inflation target, he said, adding inflation has been “slightly lower” than expected.

The rate on the three-month overnight index swap, which measures what investors predict the central bank’s benchmark will average over time, fell 1.1 percentage points to 1.06 percent after the speech. The Canadian dollar pared gains, trading at C$1.0289 per U.S. dollar at 5 p.m. in Toronto, from C$1.0326 on Sept. 29.

Trade Deficit

Canadian retail, wholesale and manufacturing sales all unexpectedly fell in July, and the country’s trade deficit widened to the biggest gap since at least 1971. Earlier yesterday, Statistics Canada reported the economy shrank 0.1 percent in July, the first decline in 11 months, matching the median forecast of 22 economists surveyed by Bloomberg News.

Canadian Finance Minister Jim Flaherty yesterday scaled back plans to withdraw stimulus by limiting proposed increases to payroll taxes amid signs of a slowing recovery. Carney said that will help to create jobs.

Carney said Canada’s economy won’t be able to rely as much on housing and personal consumption because of rising household debt levels. He said the rebound in the labor market, which has returned employment to pre-recession levels, has been led by public-sector jobs and “involuntary part-time” work.

“Although employment has regained its pre-recession level, hours worked have not,” he said.

Carney also said returning to a “durable” global recovery could take a decade. That could keep global interest rates “very low” and prompt central banks in some major economies to expand unconventional monetary policies.

Carney said that since interest rates may need to remain low, other Canadian authorities should remain “vigilant” to ensure “financial imbalances” aren’t created.

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