Mark Carney leaves the Bank of Canada this week receiving praise for sparing the country the worst of the global recession even as he bequeaths to his successor an economy saddled with consumer debt.
Carney, who kept the key interest rate at 1 percent for the 22nd consecutive announcement today, departs June 1 to take over the Bank of England a month later. Stephen Poloz, who succeeds him on June 3, will probably maintain Carney’s no-change policy for at least the rest of the year, according to economists surveyed by Bloomberg News.
Carney, the former Goldman Sachs Group Inc. banker who became head of the Bank of Canada in 2008, quickly cut the main interest rate to 0.25 percent during the crisis -- and then vowed to keep it there for a year. The innovative policy, emulated by Fed Chairman Ben S. Bernanke, helped fuel a borrowing binge that left Canadians with record household debt, which will discourage Poloz from providing additional stimulus at a time when exports are flagging.
“Poloz inherits a standstill with regards to interest rates,” said John Braive, vice chairman at Canadian Imperial Bank of Commerce’s CIBC Global Asset Management, which oversees C$52 billion ($50 billion) of fixed income assets. “It’s a tug-of-war going on here between the domestic side of the economy and the export side.”
The decision to leave the policy rate unchanged was expected by all 23 economists in a Bloomberg News survey. Inflation has been slower than expected since the last decision and economic growth has been faster, policy makers said.
“The considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required, consistent with achieving the 2 percent inflation target,” policy makers led by Carney said in today’s statement, which echoed the last decision on April 17.
Global economic growth will accelerate in 2014 with both the U.S. and Japan continuing to outpace the euro area, the Organization for Economic Cooperation and Development said in its Economic Outlook report. U.S. gross domestic product will rise 1.9 percent this year and 2.8 percent in 2014 and Japan’s will increase 1.6 percent and 1.4 percent, the OECD projected, while the euro-area economy will shrink 0.6 percent this year before expanding 1.1 percent in 2014.
In Asia today, the Bank of Thailand cut its benchmark interest rate for the first time this year as slowing economic growth bolstered government calls for easing. The one-day bond repurchase rate fell by a quarter of a percentage point to 2.5 percent.
The Canadian dollar has weakened 3.8 percent during Carney’s term, after it surged to parity with the U.S. dollar under former Governor David Dodge. The benchmark Standard & Poor’s/TSX Composite Index fell 8.4 percent in U.S.-dollar terms over Carney’s time, while the S&P 500 rose 18.2 percent. The country’s sovereign bonds with maturities greater than one year have returned 28.61 percent since Feb. 1, 2008. That’s the worst performance among all but four countries tracked by Bloomberg/EFFAS index data.
The Canadian dollar rose 0.5 percent to 1.0348 per U.S. dollar at 4:30 p.m. today in Toronto. One Canadian dollar buys 96.64 U.S. cents. Canadian bonds were mixed, with the yield on the benchmark government 10-year note falling 1 basis point to 2.06 percent. The Standard & Poor’s/TSX Composite Index fell 0.1 percent to 12,732.61.
Under Carney’s watch, the country’s banks avoided collapses and injections of public capital. Limited asset purchases kept financial markets working while freeing Canada from the risks involved in winding up extraordinary policies, such as encouraging excessive risk-taking by pension funds and insurance companies, which the U.S., Europe and Japan face.
“You have a lot of countries in Europe that would give their eye teeth for that sort of performance,” said David Rosenberg, chief economist and strategist with Gluskin Sheff + Associates in Toronto. “He certainly deserves high marks and he’s up to the job in the U.K.”
At the same time, mortgage rates near historic lows sparked a 26 percent increase in Canadian house prices over the last four years, leading Carney to warn that consumer debts are the greatest domestic threat to the economy.
Carney has, for more than a year, been the only Group of Seven central banker warning that interest rates may rise, in part to curb the borrowing his policy has encouraged. He reiterated that stance today, saying in a statement from Ottawa tighter policy may be needed after “a period of time” as the economic expansion progresses.
Carney has also kept inflation at an average 1.7 percent in his five years at the Bank of Canada, close to its 2 percent target. The International Monetary Fund forecasts Canada’s economy will grow by 1.5 percent this year, the slowest among Group of 20 countries outside Europe.
“We are stuck in Canada,” Fiera Capital Chief Executive Officer Jean-Guy Desjardins said May 23 in Montreal. “Exports can contribute positively to growth but up to a point, it won’t make up for the contraction coming from the consumer sector.”
Nonetheless, Carney, Finance Minister Jim Flaherty and banking regulators deserve praise for supporting the economy with programs to keep credit markets working in the crisis while keeping the risks of banking excess in check, said Paul Taylor, chief investment officer at BMO Harris Private Banking Manages in Toronto, which manages C$16 billion.
“Good work has been done,” Taylor said in a telephone interview. “The challenges that he faced in Canada and the job that he did are certainly going to be called into play in a much more meaningful way in his role as governor of the Bank of England.”
Carney, 48, has some practice on the world stage preparing him to become the first foreigner to run the 319-year-old Bank of England, being named by Group of 20 leaders in 2011 to run the Basel, Switzerland-based Financial Stability Board, the body charged with drafting new rules to avoid future credit crises.
His market knowledge has been invaluable, said Gluskin Sheff’s Rosenberg. That knowledge was on display at a November 2007 meeting where Carney asked who he could talk to about Freddie Mac, the U.S. mortgage financier that was put under conservatorship in 2008 amid soaring losses.
“Carney pulled out a huge spreadsheet and said ‘Here’s the problem. I’m pretty sure they’re insolvent,’” Rosenberg said.
A wider government remit will give Carney even more to do at the Bank of England because banking regulation is set by a separate agency in Canada. He hasn’t made direct comments on how he plans to spur a U.K. economy that avoided an unprecedented triple-dip recession in the first quarter as a pickup in inventories and sluggish consumer spending growth countered a slide in exports and investment.
Carney has given two speeches since his November appointment talking about the utility of giving guidance about the path of future interest rates, saying they can be useful within a central bank’s existing mandate.
“His approach to policy in Canada is consistent with a focus on forward guidance, at the expense of asset purchases,” Royal Bank of Canada strategists Mark Chandler and Jens Larsen wrote in a May 9 report. “If there is one thing that Governor Carney is not bringing to the table in his new role at the BoE, it is any ‘hands on’ experience with messy programs such as quantitative easing that are in full bloom at the U.K.’s central bank and in other places.”
Canada was “very fortunate to have somebody who had that real world financial experience at the helm; that certainly helped us navigate through the crisis more effectively,” Rosenberg said. “It is historians who will really grade Mark Carney; my sense is that history will treat him favorably.”