Carney’s leaving, but rates likely here to stay
OTTAWA — When Bank of Canada governor Mark Carney moves on to his new U.K. job in seven months, it is likely little else will have changed back home.
Interest rates will still be at near-record lows, and the economy will be continuing to churn out less-than-stellar growth.
That presents a problem for the central bank, which — faced with troubling household debt and a stillstrong housing market — insists that rates will eventually need to go higher, not lower.
Not surprisingly, Carney and his policy advisers on Tuesday kept their trend-setting rate on hold at one per cent, where it as been since September 2010 — the longest stagnant period since the early 1950s.
The tone of the statement accompanying the rate announcement was also unchanged, with the bank saying “over time, some modest withdrawal of monetary stimulus will likely be required.”
While most economists agree that borrowing costs will be going up, not down, they suspect the first move will not come until at least mid-2013, given the uncertain global recovery.
Canada’s gross domestic product grew just 0.6 per cent between July and September, down from a revised 1.7 per cent in the second quarter. The Bank of Canada had called for one per cent growth in the third quarter.
Douglas Porter, deputy chief economist at BMO Capital Markets, said “it’s going to be tough to justify raising rates if growth stays at two per cent or less, inflation stays below two per cent (the central bank target) and the currency remains above parity (with the U.S.).”
The central bank has forecast economic growth of 2.3 per cent next year, while the Finance Department expects a two per cent advance in 2013. However, the Organization for Economic Co-operation and Development is projecting 1.8 per cent growth next year, just below the average forecast by economists.
Porter said the bank is “considerably more optimistic” about 2013 than others.
Along with his policy team, Carney — who takes the reins at the Bank of England in July — reiterated Tuesday that growth will be driven by consumer and business spending, supported by Canada’s low-interestrate environment.
The bank acknowledged that housing activity “is beginning to decline from historically high levels,” but added “while the household debt burden continues to rise, growth in household credit has slowed.”