Carney Strengthens Bias to Raise Rates as Debt Risk Grows

Bank of Canada Governor Mark Carney
Policy makers led by Governor Mark Carney said in a statement today, “While global headwinds continue to restrain economic activity, domestic factors are supporting a moderate expansion.” Photographer: Norm Betts/ Bloomberg

The Bank of Canada strengthened its bias for raising interest rates, retaining its outlier status among the Group of Seven nations while signaling concern about record household debts it says will keep growing.

Policy makers led by Governor Mark Carney kept the benchmark rate at 1 percent, where it’s been more than two years, and said “some modest withdrawal of monetary policy stimulus will likely be required.” The decision to keep the rate unchanged was expected by all 26 economists in a Bloomberg News survey, while some had also said the Ottawa-based bank would weaken or drop its past wording that higher rates “may become appropriate.”

The Canadian dollar erased earlier losses after the decision, which followed Carney’s Oct. 15 speech where he left out a reference to tightening monetary policy. The bank’s bias to boost borrowing costs contrasts with easier monetary policies introduced in recent months by the U.S. Federal Reserve and European Central Bank President Mario Draghi.

“While global headwinds continue to restrain economic activity, domestic factors are supporting a moderate expansion,” the bank said in its statement. It added wording that “imbalances in the household sector” will influence the timing of rate increases and said household debts, already at record levels, will rise further.

“They have clearly amped it up a notch” on household debt, said Doug Porter, deputy chief economist with BMO Capital Markets in Toronto. “I would take it more as a caution that if the slowdown in the housing sector doesn’t stick the Bank of Canada is ready to so something about it.”

Deflating Bubbles

Carney has said that that other regulators should take the lead on deflating asset-price bubbles, saying in April that “the last line of defense is monetary policy.” Last week, Carney said “if we were to lean against emerging imbalances in household debt, we would clearly declare we are doing so.”

Canada’s dollar erased a drop, trading little changed at 99.26 cents per U.S. dollar at 10:36 a.m. in Toronto. It was down as much as 0.5 percent before the announcement. One Canadian dollar buys $1.0075. Trading in overnight swaps showed investors had swung to betting on a rate increase instead of a cut by the bank’s May 2013 meeting next May.

Global monetary policy and “safe haven flows” are influencing the Canadian dollar, the bank said in its statement. Exports are still being restrained by the currency’s “persistent strength,” leaving consumption and business investment to drive the recovery.

Dollar Rises

“The bank caught the market a little bit by surprise on this one after Carney’s speech on global economic uncertainties,” Mazen Issa, Canada macro strategist at Toronto-Dominion Bank’s TD Securities unit, said in a phone interview. “Their fidelity toward their hawkish bias has been tested and will continue to be tested over the coming months.”

The central bank raised its 2012 growth forecast to 2.2 percent from a July prediction of 2.1 percent, and repeated that growth will be 2.3 percent next year. The 2014 economic growth forecast was reduced to 2.4 percent from 2.5 percent.

Canada’s economy won’t reach full output until the end of next year, the central bank said today, later than its July prediction of for the second half of next year. It will also take until the end of next year for inflation to accelerate to the central bank’s 2 percent target, according to today’s statement, compared with a September prediction it would do so within a year.

Slower Growth

Prices for Canadian commodity exports have increased in recent months even with a “gradual” U.S. recovery, a recession in Europe and slower growth in China, the Bank said.

Companies such as Potash Corp. of Saskatchewan Inc. are showing the strains of the global slowdown. Potash on Oct. 17 forecast full-year profit below analysts’ estimates after delays in supply contracts in China and India reduced sales of the fertilizer. The company will halt production at two mines for about eight weeks.

The burden of consumer debt climbed to a record 165.8 percent of disposable income in the second quarter according to Statistics Canada, higher than recent peaks in the U.S. and U.K. The Bank of Canada said today the country’s debt burden will keep rising before “stabilizing” by the end of 2014.

One sign of strength is Canada’s job market, with a September job gain of 52,100 that was more than five times faster than economists predicted. Canadian unemployment in September was 7.4 percent, compared with 7.8 in the U.S., and has been below the U.S. rate for almost four years.

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