Carney Says Rate Increase ‘Less Imminent’ on Economy Risk

Bank of Canada Governor Mark Carney said that his inclination to raise interest rates is “less imminent” given risks to economic growth including moderate global demand and record domestic debt burdens.

“The case for adjustment of interest rates has become less imminent,” Carney, 47, told reporters in Ottawa today. “Over time, rates are more likely to go up than not,” he said, adding “to draw more precision out of it than that is false precision.”

Canada’s dollar fell after the remarks, which came a day after he kept his key lending rate at 1 percent and said in a statement that “some modest withdrawal of monetary policy stimulus will likely be required.” Carney also reiterated that using monetary policy to curb household debt is “the last line of defense” and he would be clear if he took such a step.

“They are trying to make the point that our next move is going to be up but it’s still a long way off,” said Emanuella Enenajor, an economist at Canadian Imperial Bank of Commerce in Toronto. She forecasts no move until 2014.

The Canadian dollar weakened 0.2 percent to 99.39 cents per U.S. dollar at 1:47 p.m. in Toronto. One Canadian dollar buys $1.0061. The currency had gained as much as 0.4 percent. Two-year government bond yields declined 2 basis points to 1.11 percent, while overnight index swaps showing reduced bets on rate increases next year, with them showing 3 basis points of tightening priced in for May, down from 5 yesterday.

Two-Sided Risk

Carney spoke after publishing a quarterly economic forecast that the risks from consumer debt are “two-sided” because the household debt burden is already forecast to grow to records and a new surge of housing investment could boost it further.

Consumer debt has reached a record 165.8 percent of disposable income, higher than the U.S. peak before its property bubble burst. The bank didn’t forecast how high debt levels will go.

Carney said he and other officials are tracking the housing imbalances. If he had to move to correct imbalances, he said he would outline how long he expected inflation to deviate from his 2 percent target as a result. “There’s no acting by stealth here,” he said.

Biggest Risk

“Imbalances in the Canadian household sector remain the biggest domestic risk,” the central bank said in its quarterly Monetary Policy Report. “It is possible that the elevated level of household debt is beginning to induce a more cautious attitude.”

Housing investment will reduce Canada’s economic growth rate by 0.1 percentage point next year and in 2014 after contributing 0.3 percent this year, the central bank forecast. Finance Minister Jim Flaherty’s measures to tighten residential lending, introduced earlier this year, should curb credit growth, the report said.

“With signs of overbuilding, the level of housing investment still remains near historical highs,” the central bank said.

The housing market “could regain momentum, thereby reinforcing existing imbalances,” the report said, while a sudden drop in the housing market “could have sizeable spillover effects on other areas of the economy.”

Canada’s banking system and housing market were relatively unscathed by the global financial crisis, allowing the world’s 11th-largest economy to recover ahead of other Group of Seven countries.

Stimulus Reduction

The bank’s forecast “includes a gradual reduction in monetary stimulus over the projection horizon, consistent with achieving the inflation target,” policy makers said, repeating language from past reports. Today’s document also repeated wording from yesterday’s interest-rate announcement that “over time, some modest withdrawal of monetary policy stimulus will likely be required.”

The U.S. Federal Reserve’s third round of asset purchases, known as quantitative easing, will add 0.4 percentage point to Canada’s gross domestic product by 2014, the Bank of Canada said. The recovery also remains threatened by the chance of legislated tighter fiscal policy in the U.S. -- the so-called fiscal cliff -- and Europe’s debt crisis, according to the report.

The Bank of Canada raised its economic growth forecast for this year to 2.2 percent from 2.1 percent and kept it at 2.3 percent for next year. The 2014 growth estimate was pared to 2.4 percent from 2.5 percent.

The bank said Canada’s economy was operating about two-thirds of a percentage point below full capacity in the third quarter, which is “slightly larger” than policy makers had estimated in July.

Stronger Dollar

The bank’s forecast assumes the Canadian dollar will trade at about 101 U.S. cents through 2014, compared with the July assumption of 98 U.S. cents.

On a quarterly basis, the annualized economic growth rate for the third quarter was cut to 1 percent from the July forecast of 2 percent, while the fourth quarter was boosted to 2.5 percent from 2.3 percent. Inflation will average 1.5 percent this quarter and remain below the bank’s 2 percent target until the fourth quarter of 2013, the bank forecast.

Consumption, Investment

Canada’s recovery through 2014 will be led by consumption and business investment as the strong dollar restrains exports, the central bank said. Even as housing investment slows, consumption will add 1.2 percentage points of 2.3 percent economic growth next year, according to the bank forecast.

Flaherty told CBC Radio Oct. 20 that he isn’t planning further measures to restrain the housing market because steps to tighten mortgage regulations have already slowed gains in some of the country’s major cities. Those comments followed historical revisions by Statistics Canada on Oct. 15 that boosted the ratio of consumer debt to household income.

“On the margin, that paints a picture of a slightly more vulnerable household sector,” Carney said.

Asked about the economic case for foreign investment, after Canada blocked Petroliam Nasional Bhd.’s C$5.2 billion ($5.24 billion) purchase of Progress Energy on Oct. 19, Carney said “Canada is an attractive destination for foreign investment,” without commenting on the specific transaction.

“Our challenge is how we use that capital which comes into Canada, and how we channel it most productively, so I wouldn’t overplay the investment story,” he said.

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