OTTAWA — When Bank of Canada governor Mark Carney moves onto 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 still-strong housing market — insists that rates will eventually need to go higher, not lower.Not surprisingly, Mr. Carney and his policy advisors on Tuesday kept their trend-setting rate on hold at 1%, 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% between July and September, down from a revised 1.7% in the second quarter. The Bank of Canada had called for 1% 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 2% or less, inflation stays below 2% [the central bank target] and the currency remains above parity.”Advertisement
The central bank has forecast economic growth of 2.3% next year, while the Finance Department expects a 2.0% advance in 2013. However, the Organization for Economic Cooperation and Development is projecting 1.8% growth next year, just very below the average forecast by economists.
Mr. Porter said the bank is “considerably more optimistic” about 2013 than many others.
Along with his policy team, Mr. 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-interest-rate 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.”
Weak exports, which were responsible for much of the slower growth in the third quarter, “are expected to pick up gradually but continue to be restrained by weak foreign demand and ongoing competitive challenges,” the bank said.
Meanwhile, the central bank said the U.S. economy is “progressing at a gradual pace and being held back by uncertainty related to the fiscal cliff.” That refers to automatic tax increases and government spending cuts that start kicking in next year unless Democrats and Republicans can reach a compromise on how to lessen the impact of those measures.
While Europe remains in recession and facing an unresolved sovereign debt crisis, China — the world’s second largest economy after the U.S. — appears to be stabilizing, the bank said.
“There will be two more [quarterly] Monetary Policy Reports under Mr. Carny and both of them will give him plenty of opportunity to change the tone of the bank statement and their forecasts. I certainty don’t see anything happening on rates in his final months,” BMO’s Mr. Porter said.