Carney Says Canada Rate Rise Less Imminent on Inflation

Bank of Canada Governor Mark Carney said the need to raise interest rates is less urgent because the economy will take longer to reach full output, keeping inflation below target until the second half of next year.

Policy makers kept their benchmark rate on overnight loans between commercial banks at 1 percent today, as forecast by all 27 economists in a Bloomberg survey, and said that while an increase in the policy rate may still be needed over time, it probably won’t happen soon.

“The more muted inflation outlook and the beginnings of a more constructive evolution of imbalances in the household sector suggest that the timing of any such withdrawal is less imminent than previously anticipated,” Carney, 47, said at a press conference in Ottawa today.

The world’s 11th-largest economy will be hobbled this year by weak exports and record debts that are curbing consumer spending, even as the risks of a major international shock have eased, the Bank of Canada said. It remains the lone central bank among Group of Seven nations suggesting a rate increase, as its peers have added stimulus in recent months.

“The next move for the Bank of Canada is still to raise rates, though it’s going to be a year from now,” said Michael Gregory, senior economist at Bank of Montreal in Toronto.

The Canadian dollar fell 0.7 percent to 99.91 cents per U.S. dollar at 1:06 p.m. in Toronto. One Canadian dollar buys $1.0007. Government bond yields declined, with the five-year benchmark falling to 1.40 percent from 1.46 percent, the biggest decline since Aug. 22.

No Tightening

Trading in overnight index swaps showed 3.1 points of tightening have been priced in for the bank’s September announcement, compared with 6.8 basis points yesterday. Carney told reporters today the direction of interest rates is “clear.”

“I don’t see a big change in stance from the Bank’s perspective, I just see them acknowledging that growth is slower than they had expected and hence the market is reacting to that,” Ed Devlin, head of the Canadian portfolio management team at Pacific Investment Management Co., said in a Business News Network interview.

The Bank of Canada pared its forecast for economic growth this year to 2 percent from an October prediction of 2.3 percent. The economy will reach full output in the second half of 2014 instead of the end of 2013, the bank said, as growth accelerates to 2.7 percent next year.

Little Inflation

Inflation will average 0.9 percent this quarter and remain below 2 percent until the third quarter of 2014, according to the central bank’s Monetary Policy Report published today. The previous report in October forecast 2 percent inflation by the fourth quarter of this year.

The bank’s main policy goal is keeping inflation in the middle of a 1 percent to 3 percent band. The consumer price index advanced 0.8 percent from 12 months earlier in November, the slowest pace in more than three years.

Carney is leaving Canada’s central bank June 1 to lead the Bank of England a month later, and will keep his other role as Chairman of the Financial Stability Board.

Economists predict Senior Deputy Governor Tiff Macklem will become the next governor, a subject he didn’t address at today’s press conference. Macklem did say declines in housing starts and resales are signs household imbalances are easing.

World Outlier

“It is reasonable to assume that the Bank is stepping away from leaning against financial imbalances,” in the new wording on consumer debt, said Jimmy Jean, a strategist in the fixed-income group at Desjardins Capital Markets in Montreal. “The Bank has chosen to quit being the world outlier.”

Canada’s economic expansion slowed to a 0.6 percent annualized pace in the third quarter, which was “more pronounced than the Bank had anticipated” in October, policy makers said. They cut their estimate of fourth-quarter growth to 1 percent from 2.5 percent, and reduced their forecast for the January-to-March period to 2.3 percent from 2.6 percent.

The exports that make up about a third of gross domestic product are being restrained by the Canadian dollar’s “persistent strength,” the bank said. Oil producers in Western Canada are facing a record price discount because of “transportation bottlenecks,” cutting into economic growth and wealth, the central bank said.

Oil Discount

West Canada Select oil traded at a record $42.50 discount to West Texas Intermediate crude on Dec. 14, and the gap is $37 today. The bottlenecks and price discounts pared Canada’s economic growth by 0.4 percentage points in the second half of last year, the central bank said. Companies such as Calgary-based Suncor Energy Inc. are considering cutting investment because of reduced profitability, while Prime Minister Stephen Harper has made accelerating new energy infrastructure a priority.

Mullen Group Ltd., an Alberta-based trucking and oilfield services company, said Jan. 15 it would reduce its planned capital spending by C$23 million ($23.2 million) to C$80 million, while also increasing its dividend.

“We expect 2013 to be a challenging year with little opportunity to grow our business due to economic and industry conditions,” Chief Executive Officer Murray Mullen said in a statement.

Speaking to reporters in Cambridge, Ontario today Harper said Canada has seen “a general slowing of the economy over the past, really the past half-year.”

“This is obviously going to have some fiscal impact on us, will have some impact on the pace of job creation.”

Very Turbulent

The report shows “how the Conservatives are failing to protect the Canadian economy from global turbulence,” New Democratic opposition lawmaker Peggy Nash said in a statement. “The Bank of Canada has made clear that domestic economic growth didn’t even meet the modest 2012 projections, and economic conditions in Canada, and around the world, continue to be very turbulent,” the spokeswoman for finance issues said in an e-mailed statement.

Consumer spending will “grow moderately” and housing investment will decline as households stabilize their debts, the Bank of Canada said. Consumer debt reached a record 165 percent of disposable income in the third quarter of last year, a development that policy makers called the biggest domestic risk to the economy.

Existing-home sales and housing starts have fallen, the bank said, due in part to Finance Minister Jim Flaherty’s moves to tighten mortgage rules. Still, “valuations in some segments of the housing market remain stretched,” policy makers said in the report.

Today is the first time a press conference and monetary policy report have come on the same day as the rate announcement. Previously, they took place the day after.

Before it's here, it's on the Bloomberg Terminal.