Carney May Weaken Rate Rise Commitment as Canada Growth Sputters

Bank of Canada Governor Mark Carney may water down his intention to raise interest rates today amid economic growth that has lagged forecasts.

Canada’s benchmark overnight rate will remain 1 percent in a decision due at 10 a.m. in Ottawa, according to all 22 economists surveyed by Bloomberg News. While investors have increased bets on a rate cut by year-end, most economists continue to say the central bank’s next move will be a rise, eventually.

The world’s 11th largest economy has reported slower growth and inflation as well as job losses since Carney’s last announcement in January, when he weakened language suggesting he may tighten policy. Still, it would take a “catastrophe” for Carney to actually cut rates, said Jimmy Jean, a fixed-income strategist at Desjardins Capital Markets in Montreal.

“They will acknowledge the weakness but they won’t be as dovish as the market expects,” Jean said.

Canada’s dollar fell to the weakest since June last week and two-year bond yields also hit a nine-month low on speculation Carney will drop his bias statement. Investors at BlackRock Inc. and State Street Canada have said Carney may drop the bias to raise rates today, and recommended buying short-term debt.

Statistics Canada said March 1 that output expanded at a 0.6 percent annualized pace in the fourth quarter, slower than Carney’s 1 percent January forecast. The 0.5 percent inflation rate seen in January remains well below his 2 percent target, and employment fell for the first time in six months that month.

‘Less Imminent’

While the Bank of Canada has said since April 2012 that higher interest rates are a possibility, it said in January that the timing of any increase “is less imminent than previously anticipated”.

Companies from trucking firms to pizza makers are reporting signs that domestic spending is slowing, while inconsistent global demand and the strong Canadian dollar have generated nine straight trade deficits.

There are also “a lot of clouds in the energy sector” Alain Bedard, Chief Executive Officer of Montreal-based trucking company TransForce Inc., said March 1.

“During the fourth quarter, consumers continued to be cautious spenders and this economic climate will make it even more difficult,” Paul Goddard, CEO of Pizza Pizza Royalty Corp., said on a Feb. 15 earnings call.

In a Jan. 23 report, the central bank pared its forecast for economic growth this year to 2 percent from an October prediction of 2.3 percent, and said the economy will reach full output in the second half of 2014, at least six months later than it previously forecast.

Fell Short

The bank’s projection was followed by economic reports that fell short of economist forecasts, giving Canada the lowest score among countries covered by the Citigroup Economic Surprise index.

“In the very near term, more of the elements of the downside risks have materialized,” Carney said at a Feb. 25 press conference following a speech at the Richard Ivey Business School at Western University in London, Ontario.

While no economist surveyed is forecasting a reduction in the policy rate, Canadian Imperial Bank of Commerce this week moved back its forecast rate increase to the third quarter of 2014, six months later than before, said economist Emanuella Enenajor. CIBC joined Bank of Nova Scotia and Toronto-Dominion Bank economists in pushing back their predictions for an increase.

“There is no rush for the bank to push rates higher in response to any inflationary pressure,” Enenajor said by telephone from Toronto. “We do see a broad slowdown in domestic demand and there will probably be little support from the export side.”

Record Debts

Despite the weakness, Carney will be reluctant to signal the chance of a cut given consumers continue to hold record debt levels. The country’s housing market traditionally heats up in the spring, Bank of Montreal senior economist Michael Gregory said from Toronto. The bank, the country’s fourth largest by assets, re-introduced a five-year mortgage at 2.99 percent this week, a reduction of 10 basis points.

“The bank waits and maybe doesn’t change its language,” Gregory said from Toronto. “It behooves the bank to see if the housing market starts to cool in a season where it traditionally heats up.”

Today’s announcement is the third-last before Carney leaves Canada’s central bank June 1 to lead the Bank of England a month later. He will keep his other title as chairman of the Financial Stability Board, the Basel, Switzerland-based body charged by the Group of 20 nations with developing rules to prevent another financial crisis.

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