Carney Keeps Rate-Increase Bias While Chopping Forecast

Bank of Canada Governor Mark Carney kept unchanged both his policy interest rate and his bias to tighten, even as he chopped his growth forecast for 2013 and said economic slack will persist for more than two years.

Policy makers in Ottawa held the benchmark rate on overnight loans between commercial banks at 1 percent for the 21st consecutive meeting today, as expected by all 23 economists in a Bloomberg News survey. The bank also cut its growth outlook for this year to 1.5 percent from 2 percent because of lower business investment and government spending.

Two-year government bond yields dropped to the lowest since July after the decision and the dollar fell to the weakest in a month. Carney’s reduced forecast, his last before leaving for the Bank of England in June, matches yesterday’s projection by the International Monetary Fund that put Canada as the slowest-growing economy among Group of 20 countries outside Europe.

“They want the rates to be higher but they’re constrained by the economic slack and the persistently high currency,” said Ed Devlin, head of Canadian portfolio management team at Pacific Investment Management Co., which runs the world’s largest bond fund. “They’re talking more to the average Canadian than the professional bond investor,” he said, referring to the bias.

Canada is the only Group of Seven economy signaling the potential for higher borrowing costs as its peers at the Bank of Japan, European Central Bank and U.S. Federal Reserve press ahead with extraordinary stimulus. Today’s Bank of Canada forecast relies on exports and business investment to lead the recovery after they slumped late last year.

‘Material’ Slack

“A material degree of slack has re-emerged in the Canadian economy,” policy makers led by Carney, 48, said in its quarterly Monetary Policy Report. “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,” he told reporters later.

Two-year government bond yields fell 1 basis point to 0.93 percent at 1:41 p.m. in Toronto, while 10-year yields dropped to

1.70 percent, the lowest since December, from 1.74 percent yesterday. The Canadian dollar fell 0.6 percent to C$1.0266 per U.S. dollar after touching C$1.0294, the weakest since March 13. One dollar buys 97.41 U.S. cents.

The Bank of Canada said the economy won’t reach “full capacity” until mid-2015, compared with its January projection of the second half of 2014. Growth will accelerate to 2.8 percent next year, according to the bank, faster than its 2.7 percent outlook in January. The economy will grow 2.7 percent in 2015, it said.

No Cuts

“The shine has really started to come off” the economy, said Derek Holt, vice-president of economics at Bank of Nova Scotia in Toronto. Policy makers are “signaling aggressively to markets they aren’t entertaining a rate cut and rates aren’t going anywhere for a long time.”

Suncor Energy Inc., the Calgary-based oil producer that’s Canada’s largest by market value, canceled its Voyageur joint venture with France’s Total SA on March 27 because costs rose and prices for bitumen declined. Total said it would book a $1.65 billion loss on the upgrader project that would have converted tar-like bitumen into a light, synthetic crude oil.

On a slump in gold prices earlier this week, Carney said the Bank of Canada doesn’t follow that commodity closely and said other goods are better barometers of global growth.

Slower Growth

With the slower-than-expected expansion in 2012 and 2013, Canada’s economy is now about 1.25 percent below full output, the bank said, greater than the 1 percent estimate it gave in January.

That slack will keep inflation below the bank’s 2 percent target until the second quarter of 2015, the bank said, longer than the previous estimate for the third quarter of next year.

The country’s inflation rate was 1.2 percent in February, keeping price increases below the central bank’s 2 percent target for a 10th straight month.

Canada also lost 54,500 jobs in March, boosting the unemployment rate to 7.2 percent from 7 percent.

“The economic numbers in Canada don’t look very good and the outlook is for more of the same,” Ric Palombi, a fixed-income portfolio manager at McLean & Partners Wealth Management in Calgary, said before today’s decision.

Unchanged Rate

The policy rate will remain unchanged until the fourth quarter of next year, according to a Bloomberg survey of 15 economists taken April 5 to April 10.

That would leave any rate increase to the new governor after Carney departs June 1 to take over the Bank of England. Finance Minister Jim Flaherty said he wants to name a replacement this month. Economists surveyed by Bloomberg say the top candidate is Senior Deputy Governor Tiff Macklem, who declined to answer a question today about his candidacy.

Higher rates could trigger further gains in Canada’s dollar, which the central bank said is already hurting exports because of its “persistent strength.” The currency is also elevated because of haven flows and the impact of loose monetary policies elsewhere, the bank’s report said.

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, the central bank said today. There are still signs of “overbuilding” of multiple-unit housing in some cities, it said.

Flaherty has acted four times to make mortgage lending rules more restrictive on concern that Vancouver and Toronto markets were overheating. His March 21 budget also outlined the slowest spending growth since the 1990s to meet an election promise to eliminate a deficit by 2015.

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