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BoC optimistic about rate hike

Governor Carney keeps current rate at 1%, but says rates will need to rise eventually.


October 25, 2012
by The Canadian Press

OTTAWA—Bank of Canada governor Mark Carney isn’t as eager to raise interest rates as he was a few months ago, but he made it clear that his next move will likely be to increase rather than reduce the cost of borrowing.

The central banker made the statement Wednesday following release of the latest quarterly economic outlook.

As expected, the bank kept its policy rate at 1% for the 17th time, but changed the language on its tightening bias to read that “over time” historically low interest rates will need to rise.

The case for adjustment has become less imminent,” Carney explained.

But he added, “over time rates are more likely to go up than not,” noting high levels of consumer debt and that the economy continues to expand.

Despite inserting concerns about debt as a factor in setting monetary policy, it remains “the last line of defence” and that the federal government has better tools to address the problem.

Because of global headwinds, there is a need to provide very stimulative monetary policy to encourage business investment and to encourage household borrowing,” he said. “One of the consequences, is this … risk around household debt and the first best response is to use other instruments.”

Most private sector economists don’t believe Carney will take any action on rates until late 2013 or early 2014.

This is by far the clearest communication we’ve had from the Bank of Canada over the last tumultuous nine days, and it motivated an instant drop in two-year yields and half-penny depreciation in (the) Canadian dollar,” said Derek Holt, vice-president of economics with Scotia Capital.

The loonie, which had been up early, ended the day down 0.23 cents lower at 100.51 cents US.

Overall, Carney said he is slightly more optimistic than a few months ago about developments around the world, and some aspects of Canada’s economy as well.

The housing market appears to be moderating, and so is credit growth among households, but debt-to-income is expected to keep rising from the current record 161% before levelling off in 2014.

But the most significant change may be in the risks to the global economy, following aggressive actions by policy-makers in Europe and in the US, where the Federal Reserve introduced a third round of quantitative easing. China is also showing signs of arresting its growth slide and the US housing market is picking up.

Lump all of that together, the (developments) have reduced global risk and our outlook for foreign activity is quite strong,” Carney said.

In the report issued earlier in the morning, the Bank of Canada said growth in the country is rebounding—if moderately—after hitting a sizable speed bump in the recently completed third quarter.

The bank estimates that Canada had its worst quarter in the recently completed July-September period since the spring of 2011, advancing only 1%, or half the rate the bank had expected.

The main cause, the bank said, was temporary production shutdowns in the oilpatch during the summer.

But the latest outlook from the central bank predicts activity will pick up globally and in the US, giving Canadian exporters a boost and helping the economy bounce back to 2.5% growth in the last three months of the year, followed by 2.6% gains in each of the following three quarters.

The bank expects growth in the Canadian economy to pick up in the coming quarters to a somewhat faster pace than that of its production potential,” it said.

On an annual basis, the bank says growth will average 2.2% this year, 2.3 in 2013 and 2.4 in 2014.

However, the economy is still operating below capacity and won’t be firing on all cylinders until the end of next year, it added.

The adjustments in growth are mostly tweaks from the bank’s previous projections in July, driven by historic revisions in the way the numbers are calculated by Statistics Canada earlier this month.

But the overall message of the latest analysis comes off rosier in the margins than the bank’s review in July.

Globally, the bank has kept its modest expectations for growth intact, but it has upgraded US growth somewhat to 2.1% this year rising to 3.2% in 2014. The main reason is the Fed action the bank judges will likely boost growth by 1.3 percentage points in the US in 2014. A stronger US economy also lifts the Canadian boat, the bank said, by about 0.4 percentage points in the same year.

Although the bank expects exports to pick up gradually, the main drivers of the Canadian economy remain consumer consumption and business investment.

©The Canadian Press