Bloomberg News

Carney Likely to Hold Canada Rates Amid Global Risks

April 17, 2012

The Bank of Canada is unanimously forecast to keep its key interest rate unchanged for a 13th time today, with economic risks from Europe still outweighing signs of faster consumer spending at home.

Governor Mark Carney will keep the target rate on overnight loans between commercial banks at 1 percent, where it’s been since September 2010, according to all 25 economists surveyed by Bloomberg News. The decision will be announced at 9 a.m. in Ottawa.

Spanish government bond yields have reached the highest this year even after European leaders have devoted $1 trillion of emergency funding to the debt crisis. The turmoil may overshadow signs of growth in the world’s 10th largest economy, which is seeing the fastest pace of homebuilding and job growth since 2008 and a currency trading near parity with the U.S., its largest trading partner.

“The economy still isn’t strong enough” for a quick increase in interest rates, said Emanuella Enenajor, an economist at Canadian Imperial Bank of Commerce in Toronto. “The Bank of Canada wants to avoid a significant spike in the Canadian dollar derailing the recovery.”

While economists surveyed by Bloomberg predict first- quarter economic growth at a 2.1 percent annualized pace, faster than the central bank’s 1.8 percent forecast from January, they also predicted growth of 2.3 percent in the last three months of this year, lower than the central bank’s 2.6 percent outlook.

Strength Unsustainable

Reports this month showing 82,300 new jobs and annualized housing starts of 215,600 units for March won’t be sustained, according to economists at Royal Bank of Canada and Toronto- Dominion Bank.

“The Bank of Canada will seek to quarantine its recent optimism in the numbers,” said Jimmy Jean, a strategist in the fixed-income group at Desjardins Capital Markets in Montreal.

Within Canada, the recovery is still marked by stronger growth for companies linked to consumers or exports of commodities, while manufacturing continues to struggle.

Paper company Cascades Inc. (CAS) said April 12 it’s closing an unprofitable containerboard mill in Trenton, Ontario, with 130 workers. Vancouver-based Boston Pizza Royalties Income Fund raised its monthly distribution by 6.5 percent to 9.8 cents on March 8, citing “strong same store sales growth momentum.” It was the second increase in a year and the 15th since 2002.

Bond investors are predicting about a 19 percent chance the central bank will raise rates by its September meeting, according to Bloomberg calculations based on overnight index swaps trading. The same calculations show a 2 percent chance of a move today.

Global Economic Concerns

Policy makers “have mentioned in the past the global economy remains quite weak,” said Randy LeClair, portfolio manager at Manulife Asset Management, which oversees about $16 billion. He predicted the bank won’t raise rates this year, in a telephone interview last week.

Carney today may also reiterate his March statement that household debt is “the biggest domestic risk.” He repeated that comment in his April 2 speech.

The central bank’s main goal is to keep annual inflation at a 2 percent target. Consumer prices, which rose 2.6 percent in February on higher costs for electricity and meat, have exceeded the bank’s goal for 15 straight months.

Inflation will probably recede from here as the economic recovery remains modest and budget cuts in Canada and abroad pare demand, said Enenajor at Canadian Imperial Bank of Commerce.

“We are still in a situation where the economy needs low and stimulative rates,” she said.

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net

To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net; David Scanlan at dscanlan@bloomberg.net


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