The Bank of Canada kept its benchmark interest rate at 1 percent and boosted its growth forecast, while reiterating that future interest-rate increases would be “carefully considered” because the recovery is threatened by a strong currency and Europe’s fiscal crisis.
Governor Mark Carney kept the target rate for overnight loans between commercial banks where it’s been since September, as predicted by all 32 economists surveyed by Bloomberg News. Policy makers increased their economic growth estimates for this year and 2012, adding that the currency is “restraining” a recovery in exports and Europe is a “significant source of uncertainty.”
“Any further reduction in monetary policy stimulus would need to be carefully considered,” central bankers said in a statement from Ottawa today. “This leaves considerable monetary stimulus in place, consistent with achieving the 2 percent inflation target in an environment of significant excess supply in Canada.”
Canada’s dollar has risen about 6 percent since June when the bank led the Group of Seven nations by raising its benchmark rate from a record low 0.25 percent. Further increases could boost the currency and threaten exports from companies such as flight-simulator maker CAE Inc. that Carney is relying on to support the recovery.
Gross domestic product will grow 2.4 percent this year and 2.8 percent in 2012, the bank said today, compared with an October forecast for gains of 2.3 percent and 2.6 percent, respectively. Policy makers reiterated the economy won’t reach full output until the end of 2012, and the core rate of inflation that excludes eight volatile items won’t accelerate to 2 percent until then.
The Canadian dollar weakened 0.5 percent to 99.15 cents per U.S. dollar at 10:33 a.m. New York time, compared with 98.70 cents yesterday. Earlier the currency touched 98.38 cents, the strongest level since May 29, 2008. One Canadian dollar buys $1.0086.
“The Bank of Canada was very balanced here,” said Michael Gregory, senior economist at Bank of Montreal in Toronto. “They were a little more positive on the U.S., a little bit more worrisome comments on the Canadian dollar. Those are the two ends on the tug-of-war for Canadian policy.” Gregory predicts an interest-rate increase in May.
“Net exports are projected to contribute more to growth going forward, supported by stronger U.S. activity and global demand for commodities,” the bank said in its statement. “However, the cumulative effects of the persistent strength in the Canadian dollar and Canada’s poor relative productivity performance are restraining this recovery in net exports.”
The Bank of Canada said that U.S. growth is being boosted by the extension of tax cuts and the Federal Reserve’s plan to buy another $600 billion of Treasury securities.
The boost to Canada from U.S. stimulus may only partly offset the effect of a stronger currency. Canada’s trade surplus with the U.S., its largest trade partner, was the lowest in September since December 1993 at C$1.55 billion ($1.57 billion). Canada sends about three-quarters of its exports to the U.S., including factory products such as automobiles and machinery.
The currency “is a braking force so they will be careful raising rates,” said Krishen Rangasamy, an economist at CIBC World Markets in Toronto. He predicts a May increase and a rate of 2 percent by the end of the year.
Carney can also delay his next move with the federal government yesterday tightening rules for consumer lending after household debt rose to a record, Rangasamy said. The central bank said today that “stretched household balance sheets are expected to restrain the pace of consumption.”
In Europe, the credit crisis for banks and governments is “a significant source of uncertainty to the global outlook,” the bank said today. Euro-area finance ministers yesterday pledged to strengthen the safety net for debt-strapped countries such as Greece and Ireland, and indicated they don’t face pressure to make immediate moves.
The Bank of Canada also said a quicker global recovery is boosting prices for commodities. Those products make up 45 percent of Canada’s exports. Canadian Pacific Railway Ltd., the country’s second-largest railroad and a hauler of wheat and coal, said Jan. 12 it will invest C$950 million to C$1.05 billion in capital projects in 2011 to boost productivity.
“I am very bullish” said Larry Pollock, chief executive officer of Edmonton, Alberta-based Canadian Western Bank. “Everything I see: oil prices, commodity prices, uranium and potash prices: where else would you rather be, globally?”