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Bank of Canada holds rate at 1% Print E-mail

Oct 19 2010 Jeremy Torobin theglobeandmail.com

Bank of Canada Governor Mark Carney kept his benchmark interest rate at 1 per cent Tuesday after three consecutive increases, saying the domestic recovery will be more gradual than expected, the U.S. rebound will be weaker than projected, and the global turnaround is ``entering a new phase.’’

In explaining his decision, Mr. Carney said while private demand in advanced economies will become ``sufficiently entrenched’’ to sustain the recovery, a combination of high unemployment and efforts by governments and households to trim the debt they piled up during the recession will slow the pace of growth. Also, the emerging markets that have powered the bounceback will see expansion tempered to ``a more sustainable pace,’’ Mr. Carney said. And spending by Canadian households will ``decelerate to a pace closer to the rate of income growth’’ amid a cooler housing market and deleveraging.

``At this time of transition in the global recovery, with a weaker U.S. outlook, constraints beginning to moderate growth in emerging-market economies, and domestic considerations that are expected to slow consumption and housing activity in Canada,’’ the central banker said in the statement accompanying his decision, ``any further reduction in monetary policy stimulus would need to be carefully considered.’’

The Canadian economy will grow at a 3-per-cent pace this year, 2.3 per cent in 2011 and 2.6 per cent in 2012, the central bank said. That compares with Mr. Carney’s July forecast of 3.5 per cent growth for this year, 2.9 per cent in 2011 and 2.2 per cent in 2012.

``The economic outlook for Canada has changed,’’ Mr. Carney said. ``This more modest growth profile reflects a more gradual global recovery and a more subdued profile for household spending.’’

Mr. Carney’s decision comes the week that he will meet with Group of 20 central bankers and finance ministers in South Korea at a critical juncture for the body’s efforts to advance their goal of a sustained and balanced global recovery. The meeting will be dominated by pressure to avert a so-called currency war, as China and other countries in Asia keep their exchange rates from floating freely, which the United States and other advanced economies say puts their manufacturing sectors at a disadvantage.

``Heightened tensions in currency markets and related risks associated with global imbalances could result in a more protracted global recovery,’’ Mr. Carney said.

Noting that while Canada’s recovery will be more dependent on investment by the private sector and exports as the impact of government stimulus fades and Canadians spend less, Mr. Carney warned that the strength of the country’s exports will be function of several factors including currency movements and ``prospects for external demand.’’

While the central bank will release a full analysis of its economic outlook on Wednesday, Tuesday’s statement included a couple of possible hints that Mr. Carney could remain on the sidelines through his next decision on Dec. 7, or even longer. The bank revised its projection for when inflation will return to Mr. Carney’s 2-per-cent target, as well as its forecast for when the excess slack in the economy will have been chewed up. Both are now projected to happen at the end of 2012, instead of the beginning of that year.

However, Mr. Carney also said that his decision to pause leaves ``considerable monetary stimulus’’ in place -- with the benchmark at a still-very low 1 per cent -- in keeping with his sharper warnings in recent weeks about the dangers of taking on debt that won’t be affordable when borrowing costs return to more normal levels.

See also: Behind the Bank of Canada's interest rate decision

 
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