Bloomberg News

Carney Keeps Canada’s Higher-Rate Bias on Faster 2013

December 04, 2012

Bank of Canada Governor Mark Carney kept his bias to raise interest rates, saying economic growth will accelerate next year after temporary disruptions in energy output and weak global demand curbed the expansion.

The benchmark rate on overnight loans between commercial banks remained 1 percent, where it’s been for more than two years, and policy makers said a “small degree of slack” in the economy will gradually disappear, bringing inflation to the 2 percent target over the next 12 months. Today’s decision was expected by all 26 economists in a Bloomberg News survey.

“Over time, some modest withdrawal of monetary policy stimulus will likely be required, consistent with achieving the 2 percent inflation target,” policy makers led by Carney, 47, said in a statement from Ottawa.

The central bank is relying on consumption and business investment to lead the world’s 11th largest economy over the next two years while exports remain in what policy makers have called the slowest recovery since World War II. Companies such as Cadillac Fairview Corp. are spending more to tap into consumer demand while energy producers are delaying projects.

The statement shows policy makers won’t raise rates “for a long time,” said Derek Holt, Scotiabank’s vice-president of economics in Toronto, adding “they don’t want markets thinking that they are returning to rate cuts.”

The Canadian dollar rose 0.2 percent to 99.27 cents per U.S. dollar at 9:26 a.m. in Toronto. One Canadian dollar buys $1.0074. Five-year government bond yields fell 1 basis point to 1.27 percent.

Insufficient Growth

Carney, who last week said he will leave Canada’s central bank in June to become Bank of England Governor, probably won’t see enough growth to raise rates before he departs, according to a Bloomberg economist survey.

Today’s announcement comes after Statistics Canada reported last week the economic expansion slowed to a 0.6 percent pace in the third quarter. Business investment and exports both fell at the fastest rate since the last recession in mid-2009, Statistics Canada said Nov. 30.

“Economic activity in the third quarter was weak, owing in part to transitory disruptions in the energy sector,” the central bank said today. “Although underlying momentum appears slightly softer than previously anticipated, the pace of economic growth is expected to pick up through 2013.”

Consumers, who saw their level of debt as a share of income rise to a record this year, led the July-September expansion, and the central bank said today it’s too soon to know if recent signs of moderation in housing and borrowing will last.

Canada Alone

The Bank of Canada remains alone among Group of Seven central banks in showing a bias to increase borrowing costs. Other central banks have added stimulus this year to boost growth, including asset purchases by the U.S. Federal Reserve and the European Central Bank.

Exports will be restrained by a Canadian dollar that’s been boosted by “safe haven flows and spillovers from global monetary policy,” the Bank of Canada said today.

Talisman Energy Inc. (TLM) cut its 2013 capital spending by 25 percent over 2012 levels to $3 billion on Oct. 30 as lower natural gas prices reduced cash flow for the Calgary-based producer. Suncor Energy Inc. (SU) will delay the construction of its Fort Hills oil sands project in northern Alberta and is evaluating projected costs on its planned Voyageur bitumen upgrader, which is part of a venture with France’s Total SA, Chief Executive Officer Steve Williams said Nov. 1.

Cadillac Fairview Corp. said Oct. 23 it will spend C$350 million to expand the Sherway Gardens mall in Toronto starting in January. The real estate developer is a unit of Ontario Teachers’ Pension Plan.

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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