Deepening Global Strains to Extend Carney’s Rate Pause

Bank of Canada Governor Mark Carney will extend the longest interest-rate pause since the 1950s amid signs of deepening strains in Europe and the U.S. while still saying his next move will be an increase, economists said.

The benchmark rate on overnight loans between banks will remain 1 percent in a decision due at 9 a.m. in Ottawa, all 27 economists surveyed by Bloomberg said. It would mark the 14th straight decision with no change since September 2010.

Carney’s last announcement April 17 said a rate increase “may become appropriate” because of growing domestic demand and improvements abroad, a view now challenged by questions about whether Greece will leave Europe’s currency union and the weakest U.S. job growth in a year. While trading in overnight swaps shows some investors are now betting Canada will cut rates before the end of the year, that move wouldn’t be justified, Toronto-Dominion Bank Chief Economist Craig Alexander said.

“Only if the Bank of Canada believes the domestic economy was headed into a renewed period of weakness would the Bank of Canada cut rates,” Alexander said, because the world’s 10th largest economy is still benefiting from business investment and hiring. Still, “the communique is going to have to reflect the fact the risks have become much worse than they were six weeks ago,” he said in a telephone interview.

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 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.

Job Growth

At the same time, U.S. job growth has slowed, and 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.

“This is where we can see how well the Bank of Canada can dance around events with the written word,” said Doug Porter, deputy chief economist with BMO Capital Markets in Toronto.

“The global landscape has shifted beneath the bank’s feet since the last meeting and clearly the bank cannot look past that,” Porter said, adding “I don’t think they want to do a full-scale retreat” on their language suggesting future rate increases.

‘Sensitive Times’

Finance Minister Jim Flaherty yesterday said he’s prepared to offer new 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 low interest rates in bond markets, with yields on long-term government debt at the lowest in Bank of Canada monthly figures dating back to January 1919.

“There’s nothing the Bank of Canada can do at this point to stimulate domestic demand,” Stefane Marion, chief economist in Montreal at National Bank of Canada, said in a telephone interview. “I’m still comfortable with our view that the Bank of Canada is on hold until next year.”

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