Canada Keeps Key Rate at 1%, Predicts Slower Recovery

The Bank of Canada kept its benchmark interest rate unchanged after three previous increases, saying any further tightening would be “carefully considered” as the economy will take an extra year to reach its full potential.

Governor Mark Carney kept the target rate for overnight loans between commercial banks at 1 percent and cut his forecast for growth next year to 2.3 percent from 2.9 percent. All 18 economists surveyed by Bloomberg News predicted the rate decision from Ottawa today.

“At this time of transition in the global recovery, with a weaker U.S. outlook, constraints beginning to moderate growth in emerging-market economies, and domestic considerations that are expected to slow consumption and housing activity in Canada, any further reduction in monetary policy stimulus would need to be carefully considered,” the bank said in a statement.

Canada joins central banks in Brazil, Malaysia and Australia in keeping rates unchanged to gauge the global recovery and avoiding a divergence with the Federal Reserve and the European Central Bank, where policy makers have signaled they may offer additional stimulus. The Canadian dollar fell for a fourth day, the longest decline in almost two months.

‘Heightened Tensions’

The Bank of Canada reduced its estimate of economic growth for this year to 3 percent from 3.5 percent.

“Heightened tensions in currency markets and related risks associated with global imbalances could result in a more protracted and difficult global recovery,” the bank said.

The report was “very dovish,” said Mark Chandler, head of Canadian fixed income and currency strategy at Royal Bank of Canada in Toronto. “They came across with the impression we’re going to be in this for the long haul.”

The Canadian dollar dropped 1.4 percent to C$1.0319 per U.S. dollar at 10:47 a.m. in Toronto.

Growth in the U.S. and other developed economies will be slower than expected because “of difficult labor market dynamics and ongoing deleveraging,” the bank said. Emerging-market growth will also slow as those countries tighten fiscal and monetary policies, the bank said.

China today said it would raise its benchmark lending and deposit rates for the first time since 2007, ahead of data that may show inflation accelerated to the fastest pace in almost two years.

‘Excess Supply’

Canada’s economy still has “significant excess supply” and won’t reach full output until the end of 2012, the bank said, instead of its July prediction for the start of that year. Inflation won’t reach the bank’s 2 percent target until the end of 2012. The current interest rate leaves “considerable monetary stimulus in place” to reach the inflation target, the bank said.

The Bank of Canada raised its 2012 growth estimate to 2.6 percent from 2.2 percent. The expansion will shift from being driven by consumer and government spending to business investment and exports, the bank said.

The bank may not raise rates again for six months, trading in overnight index swaps indicated. The rate on the six-month security, a gauge of what investors think the policy rate will average over that time, was 1.056 percent today, down from 1.095 percent yesterday.

“They are still leaning toward raising rates, but the economic context is preventing them from doing so,” said Sebastien Lavoie, an economist at Laurentian Bank Securities in Montreal, who also predicts no rate increase for at least six months.

Export Pressure

Canada relies on the U.S. for 63 percent of its trade, and the country’s dollar reached parity with its U.S. counterpart last week for the first time since April. U.S. Fed Chairman Ben S. Bernanke said Oct. 15 that new stimulus may be warranted because inflation is too low and unemployment is too high.

That could put fresh pressure on exporters hurt in the global recession by lost U.S. orders of manufactured goods such as autos and paper.

Forest-product maker Canfor Corp. and U.S. Steel Corp., the second-largest U.S. maker of the metal, have said they are shutting plants because of reduced demand. Canfor said Sept. 22 it will close a mill near Prince George, British Columbia, in part because of “the protracted downturn in new home construction in the U.S.” The mill employed about 185 people.

Monetary policy may become the chief tool to support the recovery with Finance Minister Jim Flaherty saying his two-year stimulus spending package will end in March. Opposition leaders such as Jack Layton of the New Democratic Party have said the government should extend some of the measures.

“Thank God Mark Carney is driving this train,” Michael Ignatieff, leader of the opposition Liberal Party, told reporters in Ottawa a half hour after the decision. “Canadians can be grateful for his prudence.”

(Updates with analyst comment in 14th paragraph, opposition comment in last paragraph.)
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