Bank of Canada Senior Deputy Governor Tiff Macklem, who may be promoted to lead the central bank later this year, said economic growth is slower than expected and will accelerate later this year.
There are early signs of a “gradual correction” of imbalances in household finances such as record debt loads while exports continue to have the slowest recovery since World War II, Macklem said yesterday in a lecture at Queen’s University, his alma mater, in Kingston, Ontario.
“Near-term momentum now appears to be slightly softer than previously anticipated,” Macklem, 51, said in the last scheduled public remarks from a Bank of Canada policy maker before a Jan. 23 interest rate decision. “We continue to expect economic activity to pick up through 2013.”
The central bank’s key interest rate has been at 1 percent since September 2010 with a strong currency and inconsistent global demand blunting exports, and policy makers have signaled since April they may raise borrowing costs as the economy moves to full output. Macklem’s household-finance comments suggest the language about interest rates will be retained this month to limit further growth in consumer debt, said Michael Gregory, senior economist at BMO Capital Markets in Toronto.
The wording “will be retained even though the Bank’s economic projection will be downgraded,” Gregory said. “More work is obviously needed” on consumer debt, he said.
Economists surveyed by Bloomberg News predict a rate increase in the fourth quarter of 2013, a time frame that may put the decision in Macklem’s hands with Governor Mark Carney leaving in June to lead the Bank of England.
The Bank of Canada’s board of directors this week started the formal process to replace Carney by placing newspaper ads and hiring a recruitment company. Economists including Toronto-Dominion Bank’s Craig Alexander say Macklem is Carney’s most likely successor.
“Housing activity is beginning to decline broadly in line with our expectations,” Macklem said. The rise in consumer debt to a record 165 percent of disposable income isn’t “sustainable,” Macklem said.
Canada’s housing market faces “more headwinds than tailwinds,” and therefore the central bank is unlikely to raise borrowing costs, according to Scotiabank analysts Derek Holt and Dov Zigler.
“The Bank of Canada is unlikely to hike rates in order to address household imbalances under circumstances of a slowdown in consumer credit growth and softer home resales,” the Toronto-based analysts said in a research report yesterday.
Macklem defended the central bank’s prolonged period of low interest rates during a question-and-answer session after his lecture, saying they were justified by the global financial crisis and have been “effective.”
“Very low interest rates were the right thing to do,” he said.
Macklem didn’t address his prospects for becoming the next governor in the speech and his remarks also left out any reference to raising interest rates.
On exports, Macklem reiterated the bank’s view that they are restrained by the Canadian dollar’s persistent strength, adding that companies need to regain competitiveness and not rely on a weaker currency to spur growth.
The economy’s expansion slowed in the third quarter because of “transitory disruptions” in the energy sector, Macklem said.
Gross domestic product growth slowed to a 0.6 percent annualized pace in the third quarter and the Bank of Canada’s October forecast predicted a rebound to a 2.5 percent pace at the end of last year.
The period of global economic turmoil may not end soon and companies will need to keep making new investments to adapt, Macklem said.
“We can’t be frozen by global uncertainties,” he said.