Carney’s Last Interest Rate Decision May Extend Pause

Bank of Canada Governor Mark Carney will probably use his last interest-rate decision to extend the longest policy pause since the 1950s and reiterate tightening may be needed after “a period of time.”

The benchmark rate on overnight loans between commercial banks will remain at 1 percent for the 22nd consecutive meeting in a decision from Ottawa due at 10 a.m. according to all 23 economists in a Bloomberg News survey.

Carney leaves Canada as the only Group of Seven central banker signaling the chance of tighter policy while the U.S. Federal Reserve and Bank of Japan rekindle growth with asset purchases, a policy Carney will oversee when he takes over the Bank of England July 1. Stephen Poloz, who succeeds Carney as governor as of June 3, will inherit responsibility for a Canadian economy increasingly reliant on exports and investment as indebted consumers and governments curb spending.

The bias to tighter policy “leaves Poloz with somewhat of an awkward situation,” said Mark Chandler, head of fixed-income strategy at Royal Bank of Canada’s RBC Capital Markets unit in Toronto. Poloz probably wouldn’t introduce a bias to raise rates if he was “starting from scratch,” Chandler said.

Poloz is likely to keep Canada’s key rate unchanged until the fourth quarter of next year according to a Bloomberg survey of 18 economists taken May 3 to May 8.

The Bank of Canada cut its forecast for 2013 growth in April to 1.5 percent from 2 percent, and said the economy won’t reach “full capacity” until mid-2015. Consumer prices have lagged behind the central bank’s 2 percent target for a year, and the inflation rate last month was the slowest since the end of the last recession three years ago at 0.4 percent.

‘Vague’ Guidance

“We would expect the Bank of Canada to retain its vague rate hike guidance that at some point, a long way off, the next move is up,” said Derek Holt, Scotiabank’s vice-president of economics in Toronto, adding that the language will be “of little consequence to fixed income markets that have little rate risk priced in,”

Canada relies on exports for about a third of its gross domestic product, and the bank has said the recovery in foreign trade is the slowest since World War II, hobbled by the Canadian dollar’s “persistent strength” and the need for companies to regain competitiveness.

The central bank also said in April that consumer debt burdens will probably stabilize around the current record 165 percent of disposable income, after being elevated in part by a rise in housing investment. Finance Minister Jim Flaherty has acted four times to make mortgage lending rules more restrictive on concern housing markets in cities such as Vancouver and Toronto were overheating.

Leon’s Furniture Ltd. reported earnings May 14 unchanged from a year ago at 12 Canadian cents a share. Executives said in the company’s quarterly report “we continue to see a soft economy with no clear signs of any major turnaround.”

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