Carney Keeps 1% Rate and Tightening Bias in Last Decision

Bank of Canada Governor Mark Carney kept the main interest rate unchanged in his final announcement and reiterated tighter policy may be needed after “a period of time” as the economic expansion progresses.

The benchmark rate on overnight loans between commercial banks remained at 1 percent for the 22nd consecutive meeting in a decision from Ottawa that was expected by all 23 economists in a Bloomberg News survey. Inflation has been slower than expected since the last decision and economic growth has been faster, policy makers said.

“The 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, consistent with achieving the 2 percent inflation target,” policy makers led by Carney, 48, said in a statement today that echoed the last decision on April 17.

Carney departs Canada as the only Group of Seven central banker signaling the chance of higher interest rates while the U.S. Federal Reserve and Bank of Japan buy assets to rekindle growth, an emergency policy he will oversee upon taking over the Bank of England July 1. Incoming Governor Stephen Poloz will take responsibility for a Canadian economy increasingly reliant on exports and investment as indebted consumers and governments curb spending.

No Waves

“It’s pretty clear Carney is going out of his way not to create any waves in his last meeting,” said Doug Porter, chief economist in Toronto at BMO Capital Markets. “Even though growth and inflation have had a few minor surprises in recent weeks, the bank suggested that core inflation and annual growth were pretty much what they had forecast.”

Canada’s dollar rose 0.4 percent to C$1.0355 per U.S. dollar at 3:45 p.m. in Toronto. It touched C$1.0421 earlier, the weakest since June 5, 2012. One dollar buys 96.57 U.S. cents.

The central bank said annualized first-quarter economic growth probably exceeded its April forecast of 1.5 percent. Economists surveyed by Bloomberg expect the May 31 report from Statistics Canada to show a 2.3 percent expansion.

The Bank of Canada today also reiterated the economy won’t reach “full capacity” until mid-2015, keeping inflation below the 2 percent target until then. The country’s inflation rate last month was the slowest since the end of the last recession three years ago at 0.4 percent. Consumer prices have lagged the central bank’s 2 percent target for a year.

Unchanged Rate

Carney leaves the central bank June 1 and will be replaced by Poloz, who led the country’s export-financing agency. The bank’s policy rate will remain unchanged until the fourth quarter of next year according to a Bloomberg survey of economists taken May 3 to May 8.

“There has been a certain perception that the Bank of Canada has a more hawkish bias to it,” said Darcy Briggs, fund manager in Calgary at Franklin Templeton Investments Corp.’s Bissett Investment Management, which oversees about C$4 billion in fixed income assets. “We don’t see it that way. It’s more neutral than anything and the Bank of Canada would be hard pressed to conduct a tightening policy.”

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. The central bank reiterated today that exports are being slowed by the Canadian dollar’s “persistent strength.”

Alcoa Inc., the largest U.S. aluminum producer, said May 16 it’s shutting two production lines in Quebec and postponing construction of a new line at the plant until 2019 as the metal’s price falls.

Today’s statement also repeated that consumer debt burdens will 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 that housing markets in cities such as Vancouver and Toronto were overheating.

(Updates with investor quote in 10th paragraph.)
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