Bloomberg News

Carney Likely to Hold Canada Target Interest Rate

July 17, 2012

Bank of Canada Governor Mark Carney is likely to say the country’s economic recovery will be hampered by global weakness as he extends today the central bank’s longest interest-rate pause since the 1950s.

The target rate on overnight loans between banks will remain 1 percent for the 15th straight time, according to all 24 economists surveyed by Bloomberg before the announcement at 9 a.m. in Ottawa. The central bank will also forecast the world’s 10th largest economy will grow less this year than it predicted in April, economists said.

Housing and employment gains are being offset by the drag from a merchandise-trade deficit and reduced confidence stemming from Europe’s debt crisis. Carney has said at his last two decisions that a rate increase “may become appropriate” as the economy approaches full output, and any retreat from that tightening bias could prompt lower bond yields, said Mark Chandler, head of fixed-income strategy at Royal Bank’s Capital Markets unit.

“The text is definitely going to be very cautious,” Chandler said from Toronto. Carney “has been swimming against the tide as a stampede of central banks has swung to easier policies.”

The U.S. Federal Reserve and the Bank of England expanded programs to buy assets in the last month, while the People’s Bank of China and the European Central Bank cut their main interest rates. Carney today will probably lower his 2012 growth forecast to 2.1 percent from 2.4 percent and delay his projection for when the economy reaches full output to the second half of next year from the first half, Chandler said.

Record Yields

Canada’s benchmark 10-year bond yield dropped to a record low yesterday on demand for the safest assets amid speculation the U.S. economy is slowing. The yield touched 1.598 percent, the lowest yield since 1950, according to Bank of Canada and Bloomberg data. The previous low was 1.615 percent on June 1.

The Canadian dollar has weakened 2.5 percent against the U.S. currency since Carney suggested in April he may increase interest rates. Canada’s benchmark stock index has fallen 5.1 percent over that period.

Trading in overnight swaps yesterday showed about a 70 percent chance the key rate will still be 1 percent after the bank’s Dec. 4 decision, compared with about a 27 percent chance it will be 0.75 percent.

“It seems strange to have every central bank in the world cutting rates or easing in some way and still have the Bank of Canada still talking about raising rates,” said Doug Porter, deputy chief economist with BMO Capital Markets in Toronto. “The case for keeping the bias is that it is already very mild, and the Bank doesn’t want to be seen flip-flopping.”

Slowing Growth

Canada’s economy probably grew at a 2 percent annualized pace in the second quarter, according to a Bloomberg economist survey, less than the central bank’s April 2.5 percent projection. Growth will also lag the central bank’s predictions through the first quarter of next year according to the Bloomberg survey.

The bank will probably lower its Canadian growth forecast for 2012 because global weakness led to a slow first quarter, Carney said after a June 21 speech in Halifax, Nova Scotia.

Companies such as Tembec Inc. are feeling the slowdown. Tembec said July 10 it would idle a pulp mill in Chetwynd, British Columbia, because the market “has continued to soften over the past year.”

Canada’s merchandise trade deficit widened to the most in almost a year in May as energy exports fell. And while the housing market has driven Canada’s recovery, Finance Minister Jim Flaherty’s Conservative government tightened mortgage rules last month, citing concern that some people were taking on debts that would become unaffordable when interest rates rise.

‘Fragile’ Economy

“We remain concerned that the economy, both internationally and domestically, is fragile,” said Sean Jackson, chief executive officer of Toronto-based Meridian Credit Union, Ontario’s largest with C$8 billion in assets.

Still, Jackson said Canada is “relatively well- positioned” versus other countries. The central bank’s quarterly business survey showed executives remained optimistic about future sales with hiring intentions at a record high, while industrial companies made the most use of their production capacity since 2007 in the first quarter on increased demand for cars and machinery.

“The economic performance has been different,” for Canada than elsewhere, said RBC’s Chandler. Bank of Canada policy makers “will hang on to this and wait to see what happens in September” at their next announcement.

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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