Bloomberg News

Carney Tighter Policy Bias to Keep Canada as G-7 Outlier

September 05, 2012

The Bank of Canada will probably remain an outlier among Group of Seven nations by keeping its inclination to raise borrowing costs in the future while other central banks consider new stimulus.

While policy makers led by Governor Mark Carney may reiterate a tightening bias, the target rate on overnight loans between banks will remain 1 percent, where it’s been for two years, according to all 27 economists surveyed by Bloomberg, in a decision due at 9 a.m. in Ottawa.

Carney has been saying since April that Canada has almost used up its spare economic capacity, and a report last week showed the economy expanded at a 1.8 percent annual pace in the second quarter, matching the central bank’s forecast. Carney’s outlook contrasts with the U.S., where Federal Reserve Chairman Ben S. Bernanke last week made the case for more easing to fight unemployment, and Europe, where European Central Bank President Mario Draghi may introduce a new bond-buying program to ease the region’s debt crisis.

“We are quite far along in the recovery compared to most major economies,” said Dawn Desjardins, assistant chief economist at Royal Bank of Canada in Toronto, who predicts a rate increase early next year. “We could still do with a little less stimulus.”

Trading in overnight index swaps late yesterday showed 19 basis points of tightening had been priced in for the April 2013 decision.

“The bank will stick to a view that at some point in the future a reduction of stimulus will become appropriate,” said Craig Alexander, chief economist at Toronto-Dominion Bank. (TD) “The timeframe of when it could become appropriate could be well into 2013.”

Lowest Rate

Canada has the lowest policy rate of any major economy that avoided the worst of the global financial squeeze that started in 2008, Carney said at an Aug. 22 speech. The central bank predicted in July that output growth will accelerate to a 2.6 percent pace in the third quarter of next year, bringing the economy to full output in the second half of 2013.

“To the extent that the economic expansion in Canada continues and the current excess supply in the economy is gradually absorbed, some modest withdrawal of the present considerable monetary-policy stimulus may become appropriate,” Carney, 47, said in the speech in Toronto, repeating language used at the past three interest rate announcements.

Planned Projects

Non-residential business investment rose at an annualized 9.4 percent rate in the second quarter, the fastest pace in a year and surpassing pre-recession levels for the first time. Calgary-based Enbridge Inc. (ENB), the largest transporter of Canadian crude to the U.S., began a series of pipeline projects in the second quarter, part of an C$8 billion ($8.1 billion) plan to boost shipments of Canadian and Bakken oil.

Companies also added an annualized C$7 billion in inventories during the quarter, Statistics Canada data show, meaning stockpiles added about 1.7 percentage points to growth in the period, the largest single contribution.

The country’s weak spot remains exports, which the Bank of Canada says won’t return to levels seen before the last recession until the start of 2014.

Finance Minister Jim Flaherty said last week he may offer new fiscal stimulus if global demand stumbles again. “What has been done before can be done again,” Flaherty said Aug. 31, adding that global weakness could also threaten his government’s plans to reduce its deficit.

Carney doesn’t need to change his message today, in part because invoking the prospect that interest rates may decline would add new momentum to a housing market that Carney and Flaherty have signaled is overheated, economists said.

“They will still keep the bias” to raise rates, said Michael Gregory, senior economist at Bank of Montreal (BMO) in Toronto. “The bar to cut rates is very high,” he said, because “economic performance is below par but not significantly so.”

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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