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Bank of Canada Says Rates May Still Rise as Risks Rise

The Bank of Canada kept its main interest rate unchanged for a 14th time today and said it may raise borrowing costs if the domestic economic recovery continues as forecast, even as global risks increase.

Canada’s growth prospects remain “largely consistent with expectations” while the global outlook “has weakened in recent weeks,” the central bank said today in Ottawa. All 27 economists surveyed by Bloomberg News forecast the key rate would stay unchanged at 1 percent.

Investors curbed bets the central bank will cut rates this year, and the Canadian dollar rose from a six-month low. The world’s 10th-largest economy may be hindered by a deepening debt crisis in Europe and cooling emerging markets, which have cut prices of commodities Canada exports, the central bank said.

“They have prefaced their rate guidance with a little bit more uncertainty now,” said Derek Holt, Scotiabank’s vice-president of economics in Toronto. “It’s fair game given the event risk we’re facing.”

The bank also said that “some of the risks around the European crisis are materializing and risks remain skewed to the downside,” while calling the expansion in the U.S., Canada’s biggest trade partner, “modest.”

The Canadian dollar strengthened 0.1 percent to C$1.0382 cents per U.S. dollar at 4:19 p.m. in Toronto. One Canadian dollar buys 96.31 U.S. cents. The currency touched a six-month low of C$1.0447 yesterday. Two-year federal government bond prices fell, with yields rising 2 basis points to 0.99 percent.

Trading in overnight swaps today shows investors pricing in 7 basis points of easing by the end of the year, down from 34 basis points yesterday.

‘Modest Withdrawal’

“To the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed, some modest withdrawal of the present considerable monetary-policy stimulus may become appropriate,” policy makers led by Governor Mark Carney, 47, said in the statement.

The Reserve Bank of Australia today cut its benchmark interest rate by a quarter percentage point to the lowest since 2009 as Europe’s crisis and slower Chinese growth overshadowed a stronger domestic labor market.

Canada reported June 1 the economy grew at a 1.9 percent annualized pace in the first quarter, less than the central bank’s 2.5 percent April estimate, as consumer spending slowed. More recent data have shown domestic strength, with housing starts at the highest since September 2007 and the biggest two-month job gain in more than 30 years.

Excess Capacity

“The Canadian economy continues to operate with a small degree of excess capacity,” the central bank said today, adding that housing has been stronger than expected, leading to a “less balanced” recovery.

The central bank also said that a drop in gasoline prices means inflation will slow to less than its 2 percent target.

European policy makers are arguing over whether rescue funds can be given directly to troubled banks, and whether indebted countries such as Greece could have access to new bonds backed by all of Europe’s fiscal union to help lower their borrowing costs.

CAE Inc., the Montreal-based producer of flight simulators, said May 23 it will fire 300 workers because of European military budget cuts.

‘Sensitive Times’

Finance Minister Jim Flaherty yesterday said he’s prepared to offer fresh stimulus if it is required and that growth so far this year has been about what he expected. “These continue to be sensitive times,” Flaherty said in Toronto.

Flaherty introduced a budget in March that plans to cut 12,000 government jobs and reduce spending as the majority Conservative government tries to eliminate a C$23.5 billion ($23.9 billion) budget deficit by the fiscal year beginning April 2015.

The economy is being supported by yields on long-term government debt that are at the lowest in Bank of Canada monthly figures dating back to January 1919.

“The Bank, unlike the market, still expects the next move to be a hike, but it is acknowledging that there is less certainty about the economy being strong enough to warrant that move,” Avery Shenfeld, chief economist at CIBC World Markets in Toronto, said in a note to clients.

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