Canada Projected to Hold Lending Rate at 1% on European Risks

The Bank of Canada will probably keep its main interest rate unchanged today and say that economic growth and price stability are still being threatened by Europe’s debt crisis.

The Ottawa-based central bank will keep its target for overnight loans between commercial banks at 1 percent, where it has been since September 2010, according to all 26 economists surveyed by Bloomberg News.

Growth in the world’s 10th largest economy will slow next year as exports are hobbled by a slowing European economy and a sluggish recovery in the U.S., the central bank has said. Governor Mark Carney said last month he has “flexibility” in how quickly he meets his inflation target during the recovery, and some investors are betting he will cut rates next year.

“They are closer to a rate cut than a rate increase based on the risks to the outlook,” said Jonathan Basile, an economist at Credit Suisse in New York. For the Bank of Canada, the risks are “not severe enough to raise the red flag” in today’s statement, he said.

European leaders have spent two years struggling to prevent contagion from affecting the region’s largest economies. Germany failed to sell 35 percent of 10-year bonds on offer at a Nov. 23 auction, a sign investors had widened their concern from the most indebted countries such as Greece.

Canada’s gross domestic product growth will slow to 1.9 percent in 2012 from 2.1 percent this year, the central bank said in an October forecast.

Bond Yields Fall

The economy is already being supported without the central bank reducing its benchmark rate. Canada’s five-year bond yield has fallen 29 basis points to 1.34 percent since the last central-bank decision in October, reducing borrowing costs. Finance Minister Jim Flaherty said yesterday he may offer new stimulus if domestic growth sags.

Growth rebounded in the third quarter to a 3.5 percent annualized pace following natural disasters that slowed exports and output in the prior three months. Companies such as Montreal-based jet maker Bombardier Inc. say they haven’t seen a sharp decline in demand for their products.

“Yes, there is caution, as a result of the economy, in the market, but orders are still being placed for business jets,” Barry MacKinnon, director of market development at Bombardier, said at a Nov. 15 industry conference.

With the U.S. buying three-quarters of Canada’s exports, economists say that the risk posed by Europe relates more to confidence. If that region’s crisis led to “a big deterioration of conditions in Canada or the U.S. there might be more pressure to lower rates but the data so far haven’t shown that,” said Nathan Janzen, an economist at Royal Bank of Canada in Toronto.

‘Barely Contained’

Carney, who last month was named chairman of the Financial Stability Board, said Nov. 23 in Montreal that Europe’s debt crisis is “barely contained” and he has “flexibility” in keeping interest rates low while meeting his inflation target. He also said Canada’s economy may return to full capacity “well into 2013,” a slight change from an October prediction the economy would reach full output by the end of that year.

Consumer prices advanced 2.9 percent in October from a year earlier, Statistics Canada said Nov. 18, and the central bank predicts inflation will slow to 1 percent by the middle of next year. The central bank sets rates to keep prices advancing in the middle of a 1 percent to 3 percent range.

That forecast allows central bankers to keep rates unchanged for now and react only if there is a major swing in economic growth prospects, Basile said.

“Everyone is very focused on Europe,” he said. In Canada, “their problems aren’t as big as other central banks.”

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