Carney to Extend Canadian Record Interest-Rate Pause on Europe Debt Crisis

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Carney to Extend Canadian Record Interest-Rate Pause on Europe Debt Crisis

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By Greg Quinn - Jan 17, 2012 12:01 AM ET

Governor Mark Carney will probably extend a record period of unchanged interest rates today to counter the economic risks posed by Europe’s sovereign- debt crisis.

The Ottawa-based bank’s benchmark target for overnight loans between commercial banks will remain at 1 percent, where it’s been since September 2010, in a decision due at 9 a.m. New York time, according to all 26 economists surveyed by Bloomberg News.
The pause is the longest since the central bank adopted the overnight target as its policy rate in 1994, and longer than the “conditional commitment” to hold it at 0.25 percent that lasted from April 2009 to June 2010. Carney has focused on Europe, the sluggish global recovery and Canadian households constrained by record debts in recent statements, leading economists to predict he may not raise rates until next year.
“This isn’t business as usual so the Bank of Canada will take a very measured approach,” said David Madani, an economist at Capital Economics in Toronto and a former senior economist at the central bank. “As we move to the end of the second quarter it will become clearer the Canadian economy is struggling” with rising unemployment and sluggish exports, he said.
The European Central Bank, Norway and Australia cut interest rates last month to stem the damage from slowing global growth, and Canada’s six-month overnight index swap rate of 0.956 percent signals some investors are betting on a similar move in the first half of this year.

Contain the Crisis

European leaders have spent two years struggling to stem the crisis, and on Jan. 13 Standard & Poor’s reduced the credit ratings for nine of 17 European countries including France, Italy and Spain.
Carney, who was named chairman of the Financial Stability Board in November, will hold a press conference tomorrow after releasing a Monetary Policy Report with a detailed economic growth forecast he may foreshadow today.
Canada’s gross domestic product growth will slow to 1.9 percent this year from 2.1 percent in 2011, the central bank said in an October forecast.
“We haven’t seen anything yet that suggests there is going to be a boom,” in the next few months of data, said Pedro Antunes, director of economic forecasting at the Conference Board of Canada in Ottawa. “You don’t want to nip a recovery in the bud and I think they are being very careful,” Antunes said.
Household debt rose to a record 153 percent of disposable income in the third quarter as borrowing increased, Statistics Canada said Dec. 13. The bank said last month consumer debt is the main domestic risk to financial stability, and predicted the burden will keep reaching records as income growth lags behind borrowing.

Prolonged Softness

“We may well be entering a prolonged soft patch after leveraging up so much of the household sector’s gains,” said Derek Holt, Scotia Capital’s vice-president of economics in Toronto.
Finance Minister Jim Flaherty, who ended a two-year government stimulus program, said last week he will consider new initiatives if there is new major slowdown. On Nov. 8, Flaherty pushed back his target for eliminating Canada’s deficit by a year to 2015 because slower growth will erode revenue.
Some executives also say that the recovery may be curbed by events abroad, including the U.S., which buys three-quarters of Canada’s exports. RealtyTrac Inc., an Irvine, California-based data vendor, said Jan 12 that banks may seize more than 1 million U.S. homes this year, a 25 percent increase.

Not Immune

Canada’s consumers have been steady, Rogers Communications Inc. Chief Executive Officer Nadir Mohamed said on a conference call last month, adding “we’re not going to be immune to what’s happening in the rest of the world, Europe and the U.S.”
Carney’s interest-rate freeze comes even as inflation exceeds his 2 percent target. Consumer prices rose 2.9 percent in November from a year earlier, Statistics Canada said Dec. 20. The average monthly gain in consumer prices through November was 3 percent, on pace for the highest average pace since Canada adopted inflation targets two decades ago.
The central bank predicts inflation will slow to 1 percent by the middle of this year, and its mandate is to keep prices advancing in the middle of a 1 percent to 3 percent range.
Carney has said he has “flexibility” in how quickly he meets his inflation target during the recovery. His last speech on Dec. 12 said events in the U.S. and Europe “mark a rupture.”
“These are trying times,” he said. “As a result of deleveraging, the global economy risks entering a prolonged period of deficient demand.”

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