Bank Of Canada Changes Tack As Economic Ground Shifts

Posted on June 6/2012 by

OTTAWA—Bank of Canada Governor Mark Carney is playing down the need to boost borrowing costs at home as the world waits to see if European leaders can halt the mounting financial chaos on the continent.

In a significant shift, the central bank kept its trend-setting interest rate steady at 1 per cent Tuesday but eased away from warnings that higher interest rates were likely in the near future.

It was largely a reaction to an economic crisis in Europe that is sparking fears of a spreading financial meltdown that, if unchecked, could spiral into a repeat of the 2008-09 global recession.

Prime Minister Stephen Harper warned Europeans to act urgently.

“I don’t want to sound too alarmist, but we are kind of running out of runway here,” he told CBC-TV. “And in terms of structure of the eurozone and in terms of addressing these problems, we do need to see a broader game plan.

“We just can’t say, ‘Let’s wait until the Greek election,’ “ Harper said in a reference to the June 17 election in Greece that could spell out the fate of the eurozone. “We cannot have a Greek election determining the future of the global economy, that’s not fair to anybody.”

Like central bankers around the globe, Carney is keeping his options wide open as the European Union struggles to deal with the current debt troubles threatening Spain, Italy, Portugal and Greece.

A continent-wide banking crisis would damage global economic conditions, and finance ministers from Canada and other G7 developed nations held an emergency conference call Tuesday in which they discussed the need for timely, concerted action by EU members.

No plans for collective G7 help for Europe emerged from the meeting, but Japanese Finance Minister Jun Azumi said major European countries promised to address the crisis responsibly.

Carney, who signalled in April he was keen to begin driving up borrowing costs to head off inflation, is now saying such a move hinges on further improvements in business conditions.

A hike in the bank’s trend-setting rate will depend on “the extent that the economic expansion continues,” Carney said in a statement accompanying Tuesday’s rate decision. In the subtle language of central bankers, it was a telling change in tone that means Canadians are unlikely to see a rise in borrowing costs for some months. Many economists believe that, under the current economic circumstances, the bank will hold steady at 1 per cent until next year.

“The outlook for global economic growth has weakened in recent weeks,” Carney said. “Some of the risks around the European crisis are materializing and risks remain skewed to the downside. This is leading to a sharp deterioration in global financial conditions.”

He also noted that, while the U.S. economy continues to expand at a modest pace, economic activity is slowing in emerging market economies such as China, Brazil and India.

Assessing the Bank of Canada’s current outlook, BMO Capital Markets economist Doug Porter said, “Essentially, the ground has shifted out from under their feet in the last seven weeks since their last (rate-setting) meeting when they sent a rather clear warning that higher interest rates were coming.”

Carney said underlying momentum in the Canadian economy appears consistent with the bank’s prediction of 2.4 per cent growth in 2012 despite slightly slower-than-expected expansion in the first three months of this year, when growth on an annualized basis came in at only 1.9 per cent.

The next rate-setting is scheduled for July 17.


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