Bank of Canada Governor Mark Carney prolonged a record period of low interest rates to support an economy that he said would be hobbled by slowing growth in China, Europe and the U.S.
Carney kept his benchmark overnight rate at 1 percent for the 11th straight time today, the longest stretch since the central bank began targeting that rate in 1994. Growth in Canada and the U.S. will be “more modest” than forecast in October as European leaders struggle to contain a debt crisis, the Ottawa-based bank said in a statement today.
“It’s quite unusual to have rates this low this far into the cycle, but it’s also unusual to have all these risk factors over their head,” said Stefane Marion, chief economist at National Bank Financial in Montreal.
Canada’s exports of services and goods from oil to automobiles, which account for about 35 percent of the world’s 10th largest economy, are threatened by slowing global demand and the “persistent strength” of its currency, the Bank of Canada said. Recent signs of a pickup in the U.S., Canada’s largest market, are likely to be transitory, it said.
While the U.S. “had more momentum than anticipated in the second half of 2011, the pace of growth going forward is expected to be more modest than previously envisaged, largely due to the external environment,” policy makers led by Carney, 46, said in the statement. “There is considerable monetary policy stimulus in Canada,” the bank said, echoing its previous decision.
Canada’s economy will expand by 2 percent this year and 2.8 percent next year, compared with an October forecast for expansions of 1.9 percent and 2.9 percent, the bank said. The estimate of 2011 growth was increased to 2.4 percent from 2.1 percent.
China’s growth is “decelerating as expected towards a more sustainable pace,” the Bank of Canada said today, adding that commodity prices other than oil through next year will be lower than forecast in October.
China, the world’s second-biggest economy, grew at an 8.9 percent pace in the last three months of 2011 from a year earlier, the slowest rate in 10 quarters, the statistics bureau said today in Beijing. Growth exceeded the 8.7 percent median of 26 estimates in a Bloomberg survey.
In the U.S., the Federal Reserve Bank of New York’s general economic index rose to 13.5, the highest level since April, from a revised 8.2 in December. Readings higher than zero signal expansion among companies in the so-called Empire State Index, which covers New York, northern New Jersey and southern Connecticut.
German investor confidence jumped the most on record in January. The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict economic developments six months in advance, surged to minus 21.6 from minus 53.8 in December, its second straight increase. The 32.2-point gain is the biggest in two decades of data.
The better-than-projected economic data helped propel a global equity rally. The MSCI All-Country World Index rose 0.7 percent, and the Standard & Poor’s 500 Index added 0.4 percent to 1,293.67 at the close in New York. Canada’s benchmark Standard & Poor’s/TSX Composite Index declined 0.2 percent.
Carney said in a Dec. 12 speech in Toronto that Canada has to reduce its “reliance on debt-fuelled household expenditures.” Consumer spending helped the country exit recession in 2009 faster than other Group of Seven nations.
“A lot of the things that pulled Canada out of the recession quickly can’t continue to lead the way, and now we need help from the rest of the world,” said Doug Porter, deputy chief economist with BMO Capital Markets in Toronto.
Interest Rate Cuts
The European Central Bank, Norway and Australia cut interest rates last month to stem the damage from slowing global growth.
“The bias is still just to keep rates on hold for the foreseeable future,” said Mazen Issa, Canada macro strategist at TD Securities in Toronto “As long as these external headwinds persist, the bank doesn’t have any incentive to take rates higher.”
Carney’s interest-rate freeze comes even as inflation exceeds his 2 percent target. Consumer prices rose 2.9 percent in November from a year earlier, Statistics Canada said Dec. 20. The average monthly gain in consumer prices through November was 3 percent, on pace for the highest average pace since Canada adopted inflation targets two decades ago.
The central bank predicted in October inflation will slow to 1 percent by the middle of this year. Today, the bank said that the economy will return to full output and the pace of price increases will accelerate back to its 2 percent target in the third quarter of 2013, one quarter earlier than it had forecast.
Carney, who was named chairman of the Financial Stability Board in November, will hold a press conference tomorrow after releasing a detailed forecast in a Monetary Policy Report.
Finance Minister Jim Flaherty, who has ended a two-year government stimulus program, said last week he will consider new initiatives if there is new major slowdown. On Nov. 8, Flaherty pushed back his target for eliminating Canada’s budget deficit by a year to 2015 because slower growth will erode revenue.
The Bank of Canada today also reiterated that household debt will keep rising to records, after reaching 153 percent of disposable income in the third quarter. The bank said last month consumer debt is the main domestic risk to financial stability.
Flaherty said today he’s prepared to intervene in the country’s housing market if necessary, though the government has no plans to take immediate action.
“We watch the housing market carefully, and we are prepared to intervene if necessary,” Flaherty told reporters, adding there has been some “softening” in the country’s housing market. “Having said that, we’re not about to intervene in the housing market now.”