Poloz Likely to Keep 1% Rate as Inflation Weighs

Bank of Canada Governor Stephen Poloz will probably keep the benchmark interest rate unchanged today as he weighs the risks posed by inflation that’s been below target for more than a year against concerns that lower borrowing costs could lead consumers to add to record debts.

The benchmark rate will remain at 1 percent in an announcement at 10 a.m. in Ottawa, according to all 22 economists surveyed by Bloomberg News. Canada’s key policy rate has been unchanged since September 2010.

Poloz surprised investors at the last decision Oct. 23 by dropping language about the need to raise interest rates in the future, sending the currency and bond yields lower. Since then, consumer-price gains have slowed while output rose at the fastest pace in two years. The conflicting data mean officials won’t signal any policy direction for a while, said David Watt, chief economist at HSBC Holdings Plc’s Canadian unit.

“The Bank of Canada is in park, the car is in the garage and they have taken the keys out of the engine and thrown them down the street,” Watt said by telephone from Toronto. “They are basically going to have to wait for the global economy to recover and keep rates on hold.”

Policy makers have said slack will persist in the world’s 11th largest economy until the end of 2015 because of sluggish exports and investment, keeping inflation below their target for two more years and delaying the need for higher interest rates.

Weaker Dollar

Canada’s dollar dropped as much as 1.1 percent just after the bank’s last decision, while yields on 10-year government bonds fell to the lowest since July. The currency has depreciated 3.5 percent against the U.S. dollar since Poloz became governor June 3, ranking it 12th out of 16 major currencies tracked by Bloomberg. It fell yesterday to touch C$1.0673 per U.S. dollar, the weakest since August 2010.

The inflation rate slowed to 0.7 percent in October from a year earlier, outside the central bank’s target range of 1 percent to 3 percent. The third-quarter gain in gross domestic product of 2.7 percent suggests the risk of even weaker inflation has faded and Poloz doesn’t need to signal more stimulus, said Dawn Desjardins, assistant chief economist at Royal Bank of Canada in Toronto.

“I know it beat their estimate of potential growth by a full percentage point but I don’t think it’s going to turn the dial” toward signaling tightening again, she said. “Inflation is below what they are comfortable with but I don’t think we are headed for further declines or any deflationary cycle.”

Signaling new monetary stimulus may not help exports much and instead encourage more debt-fueled consumer spending that Poloz has identified as a key risk to the economy.

Record Debts

The ratio of household debt to disposable income rose to a record 163.4 percent of disposable income in the second quarter on increased mortgage borrowing, according to Statistics Canada. There will be a “gradual unwinding” of those debts, Poloz told lawmakers on Nov. 20.

“The Bank of Canada still considers household imbalances as a key risk in the economy,” said Emanuella Enenajor, an economist at Canadian Imperial Bank of Commerce in Toronto. “Until we get stronger global growth the 1 percent rate is going to be the appropriate prescription for the economy.”

Potash Corp. of Saskatchewan Inc., the world’s largest fertilizer producer by market value, said yesterday it will pare its global workforce by 18 percent and reduce capacity amid weaker-than-expected demand in emerging markets.

Business investment and exports have lagged growth of consumer spending over the past year, defying central bank forecasts for a rotation of demand.

The last GDP report did little to suggest that rotation is gaining traction, with the main sources of growth coming from inventory accumulation and consumer spending, Watt said. The Canadian dollar’s slide won’t jolt shipments abroad, he said.

“I don’t think the weakness that we’ve seen is going to make that much difference” to policy makers, Watt said of the currency’s decline. “The key driver is when the U.S. economy picks up.”

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