Bloomberg News

Carney to Keep Tightening Bias as Consumers Lead Recovery

December 04, 2012

Bank of Canada Governor Mark Carney will probably repeat today that higher interest rates may become necessary “over time” as heavily-indebted consumers lead the country’s meager growth.

The benchmark rate on overnight loans between commercial banks will remain at 1 percent, the 18th straight time since September 2010 that policy makers have left borrowing costs unchanged, according to all 26 economists surveyed by Bloomberg News. The decision will be announced at 9 a.m. in Ottawa.

While economists and investors say they’re certain about the decision, they’ll look for changes in the wording of the accompanying statement. Canada’s dollar rose after the bank’s Oct. 23 announcement, when policy makers altered language to say tighter policy “will likely be required,” rather than “may become appropriate,” and fell the next day when Carney told reporters the need for higher rates was “less imminent.”

“In this environment there’s something to be said for keeping the status quo” in the bank’s language, said Derek Burleton, Toronto-Dominion Bank’s deputy chief economist. “Why introduce another shift in gears unless there is a real need?”

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 that the economic expansion slowed to a 0.6 percent pace in the third quarter. Consumers, who saw their level of debt as a share of income rise to a record this year, led the expansion, and Carney has said that household debt represents the biggest domestic threat to the Canadian economy.

Trailed Forecast

While the growth pace trailed the central bank’s 1 percent forecast, policy makers have already said their “next move will be higher, even if it’s over the next couple of years, and I don’t think they need to change that,” said Avery Shenfeld, chief economist at CIBC World Markets in Toronto.

“The statement will acknowledge the sluggish pace of growth,” he said.

At the same time, Carney wants to prevent investors from starting to bet on interest rate cuts because Canada’s recovery is advanced compared with other Group of Seven nations, economists said.

The bank’s inclination to raise rates “is going to stay there for a while,” said Michael Gregory, senior economist at Bank of Montreal in Toronto. “Canada’s situation is unique,” he said, because “we have very little slack in the economy.”

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.

Biggest Threats

The biggest external threats to the world’s 11th largest economy are Europe’s debt crisis and the U.S. fiscal cliff -- the more than $600 billion in tax increases and spending cuts that will begin in January unless Congress acts.

Carney told lawmakers Oct. 31 that global business investment has been curbed by confusion over what policy makers are doing to boost global growth. “There is a relatively high degree of uncertainty about the stance of economic policy across many major jurisdictions,” he said.

Business investment and exports both fell in the third quarter at the fastest pace since the last recession in mid-2009, Statistics Canada said Nov. 30.

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. 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.

Little Inflation

Carney’s main policy goal is keeping inflation in the middle of a 1 percent to 3 percent band, and there’s little risk of prices accelerating now, said Shenfeld of CIBC. The consumer price index advanced 1.2 percent in October from a year earlier, the same pace as the prior two months, Statistics Canada said Nov. 23.

“Carney could start working on Bank of England policy at this point because it doesn’t look like he will have anything to do at the Bank of Canada in his remaining months,” Shenfeld 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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