Carney Extends Canada Interest Rate Pause Amid Inflation

Bank of Canada Governor Mark Carney
“Recent developments suggest that the outlook for the Canadian economy is marginally improved” since the decision in January, policy makers led by Governor Mark Carney, 46, said in a statement from Ottawa today. Photographer: Norm Betts/Bloomberg

The Bank of Canada today joined its peers in the euro region and U.K. in prolonging monetary stimulus and said the risks are edging toward quicker inflation and away from another global recession.

The central bank kept its main interest rate at 1 percent, extending the longest pause since the 1950s, and said there is less slack in the economy amid easing global tensions and faster domestic spending that may lift prices.

The Canadian dollar rose after the announcement, which came on the same day European Central Bank President Mario Draghi said inflation will probably breach the bank’s 2 percent limit this year “with upside risks prevailing.” Two Bank of England policy makers said last week that inflation may be firmer than the central bank has projected.

The Bank of Canada is “trying to bring a broader range of risks to the attention of financial markets, households and businesses,” including inflation, said Dawn Desjardins, assistant chief economist at Royal Bank of Canada in Toronto. “The economy still requires tender loving care of low interest rates.”

The Bank of Canada said in Ottawa today inflation will be greater than it forecast in January because of “reduced economic slack and higher oil prices,” and that growth will be faster than projected in the January-March period because of temporary factors that it didn’t specify.

“Recent developments suggest that the outlook for the Canadian economy is marginally improved” since the decision in January, policy makers led by Governor Mark Carney, 46, said in a statement.

‘Change in Tone’

“Nothing in here signaling a rate hike coming soon, but markets will pick up on the slightly improved change in tone on the economy, and might move forward the implied date for the first rate hike” said Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce in Toronto.

The currency rose 0.7 percent to 99.02 cents per U.S. dollar yesterday in Toronto. One Canadian dollar purchases $1.0099. Government bonds fell, with the yield on the benchmark five-year security rising 6 basis points to 1.50 percent.

Elsewhere, jobless claims in the U.S. rose to a level that still shows an improving labor market. First-time filings for unemployment benefits climbed 8,000 last week to 362,000, the Labor Department said.

Job gains are helping bolster household confidence. The Bloomberg Consumer Comfort Index was minus 36.7 in the period ended March 4, the highest since April 2008, compared with minus 38.8 in the prior period. The buying climate gauge rose to a level last exceeded in December 2009.

Europe’s Draghi

In Europe, Draghi said today inflation will probably breach the bank’s 2 percent limit this year and signaled the worst of the sovereign debt crisis may be over even as the economy stalls.

“Inflation rates are now likely to stay above 2 percent in 2012, with upside risks prevailing,” Draghi said in Frankfurt today after the ECB kept its benchmark interest rate at a record-low 1 percent. While the economic outlook remains weaker, “the risk environment has improved enormously,” he said.

Draghi said the ECB’s latest economic projections show inflation averaging 2.4 percent in 2012, up from a December forecast of 2 percent. They show the economy may contract 0.1 percent, down from the previous forecast for 0.3 percent growth.

German industrial output increased more than economists forecast in January, rebounding from a December slump as construction activity jumped. Production rose 1.6 percent from December, when it fell 2.6 percent, which was the steepest decline in almost three years, the Economy Ministry in Berlin said today.

Bank of England

The Bank of England today kept its bond-purchase target at 325 billion pounds ($514 billion) after raising it by 50 billion pounds last month and held its benchmark interest rate at a record low 0.5 percent. Over the past two weeks, potential divisions emerged after Martin Weale indicated he may not favor further purchases after the current round ends in May and David Miles said there’s a case for “aggressively” loosening policy.

In the U.S., which buys about 75 percent of Canada’s exports, Fed Chairman Ben S. Bernanke told lawmakers last week that an increase in energy costs will boost inflation “temporarily while reducing consumers’ purchasing power.” He also said the central bank will adopt a “balanced approach” as it pursues its twin goals of price stability and full employment.

The Bank of Canada said today that the rise in oil prices could also “dampen the improvement in global economic momentum” if it persists.

Oil Prices

Oil prices may surpass current records of $147 a barrel in the first half of this year because of the “smoldering crisis” in the Persian Gulf, Erste Group Bank AG of Vienna estimated today. Oil for April delivery rose 66 cents to $106.83 a barrel at 11:06 a.m. on the New York Mercantile Exchange.

Canada relies on exports for about 33 percent of its output, and higher interest rates could boost a currency that has traded around parity with the U.S. dollar, harming the country’s competitiveness. The bank reiterated today that the “persistent strength” of the currency is a drag on the recovery.

Cardboard box and tissue-maker Cascades Inc. said Feb. 22 it will close a Toronto plant with 36 employees, citing a “significant reduction in business volume.” The next day the company said “the strength of the Canadian dollar had a significant impact on our profit margins.”

The country’s job market has softened, with unemployment reaching a nine-month high of 7.6 percent in January.

Fourth Quarter

Canada’s economic expansion slowed to a 1.8 percent annual pace in the fourth quarter, according to a March 2 Statistics Canada report, even while U.S. growth accelerated to 3 percent. In January, the Bank of Canada forecast growth averaging 1.8 percent in the first half of this year.

Consumers will account for more than half of Canada’s 2 percent economic growth this year, according to the central bank’s January forecast document. “Private demand is now expected to be slightly stronger than projected, owing to improved sentiment and highly-supportive financial conditions,” the bank said today. “Canadian household spending is expected to remain high relative to gross domestic product as households add to their debt burden, which remains the biggest domestic risk.”

Consumer spending expanded at a 2.9 percent annual pace in the fourth quarter, up from 1.8 percent in the third quarter, Statistics Canada said, while business investment rose 6.3 percent, the eighth consecutive increase.

Telus Corp., Canada’s third-largest wireless carrier, said last week it will spend C$3 billion on new buildings and equipment and hire 1,300 people over the next three years in British Columbia where it’s headquartered.

“They are leaning toward a better outlook” and “they are not even considering rate cuts” said Jonathan Basile, a Credit Suisse economist in New York.

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