An improving economic outlook may ease pressure on the Bank of Canada’s newly appointed chief to abandon the only tightening bias in the Group of Seven.
A majority of economists in a Bloomberg News survey predicted Stephen Poloz, who takes over the Ottawa-based institution June 3 after Bank of England Governor-designate Mark Carney steps down, will retain language about raising interest rates because the nation’s economy is showing signs of gradual and durable growth.
Economic reports last week suggest output growth probably accelerated to faster than a 2 percent annualized pace in the first quarter while quickening U.S. job growth may herald improving demand from the country that buys three-quarters of Canada’s exports. The central bank has signaled borrowing costs may rise to contain record household debts, even as G-7 counterparts ease policy to spur growth.
“Their very mild bias will look appropriate for a little longer yet,” said Doug Porter, chief economist with Bank of Montreal in Toronto, who raised his 2013 growth forecast to 1.6 percent last week. “We are transitioning away from a purely domestically led recovery to one led by the U.S.”
Four of 10 economists surveyed after Poloz’s May 2 appointment said the tightening bias will remain, and another four said the odds it would be dropped are 30 percent or less. One respondent said the odds of the bias being removed were about 50 percent after Poloz takes over, and the other Carney would remove the bias before he leaves.
Carney makes one more rate decision on May 29, and Poloz follows up at a July 17 announcement that includes a new quarterly economic forecast.
An export slump late last year led the central bank’s six- member policy group headed by Carney to soften language about raising borrowing costs and reduce the 2013 growth forecast to 1.5 percent from 2 percent.
Poloz said the bank has done “a superb job” guiding the economy and “laid the groundwork for recovery” when asked if monetary policy would continue after he takes over. Carney told reporters May 2 in Edmonton, Alberta, that there is “a bit more momentum” in the economy than the bank previously thought.
Gross domestic product rose 0.3 percent in February, matching January’s revised pace, Statistics Canada reported April 30, which economists said puts the world’s 11th largest economy on track for its fastest quarterly growth since 2011.
The Bank of Canada has kept its policy rate at 1 percent since September 2010 in the longest pause since the 1950s.
Poloz’s decision about the bias “will be driven by the economy rather than a preference,” said Craig Wright, chief economist at Royal Bank of Canada, the country’s biggest bank by assets. “Barring any deterioration in the economic outlook between now and the next meeting it would be difficult to justify a change in bias.”
Poloz may also want to guard against a perception that his last job as head of Canada’s export financing agency will sway him to looser policy that supports companies in that part of the economy, Wright said. “Altering the bias would play into these expectations,” he said.
Carney has said Canada’s expansion must shift over the next two years from consumer spending fueled by debt to business investment and exports. Reports last week suggest that is happening, including the first trade surplus in a year in March, and the faster-than-expected increase in U.S. payrolls in April.
“We view the current forward looking statement as consistent with the narrative of a gradual rise in economic growth,” Mazen Issa, Canada macro strategist at TD Securities in Toronto, wrote in a research note. “The ever so slight tightening bias should remain intact.”
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