Bank of Canada poised to raise interest rates

Posted on 19. Jul, 2010 by in News

Mark Carney expected to take his cues from the global economic picture, which isn’t particularly rosy

Jeremy Torobin Ottawa— Globe and Mail Update
Monday, Jul. 19, 2010 08:04AM EDT

Mark Carney is likely to raise borrowing costs for the second straight time Tuesday, while continuing to sound a cautious tone as belt-tightening in Europe, efforts to restrain China’s growth, and plunging consumer confidence in the U.S. cast a pall over Canada’s prospects.

All 12 primary securities dealers and most economists say the central-bank governor will lift his main interest rate by another 25 basis points, to 0.75 per cent. The labour market has recouped most of the jobs lost during the recession and companies are seeing better demand, suggesting the private sector will be able to lead economic growth after federal and provincial stimulus largesse runs out later this year.

Investors are less confident about later decisions, and that may not change this week because Mr. Carney is likely to reiterate that his path to a more neutral, pre-crisis policy stance depends on the developing economic stories around the world.

An initial clue to his thinking will come Tuesday in the statement on his rate decision, which will include highlights from a comprehensive forecast that he’ll release Thursday. Those forecasts could point to a slower, more grinding recovery both here and abroad, economists say.

“There are too many things going on: there’s the European situation; China’s sort of slowing down; even within Canada it looks like the housing sector – which was the thing that really powered us out of the recession – seems to be slowing,” Stephen Gordon, an economics professor at Laval University in Quebec City, said in an interview. “There are all kinds reasons to think that rates of growth will be slower, but that’s a long way from talking about a double-dip.”

Even against that backdrop, economists say there will be at least a few more rate hikes in a row, since Canadian inflation isn’t very far from policy makers’ 2-per-cent target and the economy is the envy of the Group of Seven. Most predict the Bank of Canada will finish the year with a benchmark rate at a still-historically-low 1.25 per cent or 1.5 per cent, as policy makers move cautiously and gauge whether Canada might be pulled into another downturn despite its comparative strength.

“The domestic situation is arguing for a fairly aggressive increase in rates, but the foreign situation is providing either heightened risks around that or a case to dampen that aggressiveness,” said Chris Ragan, a former visiting economist at the Finance Department who is now the David Dodge Chair in monetary policy studies at the C.D. Howe Institute. “The question is how much weight they put on those foreign forces.”

A quarterly survey of Canadian executives that the central bank released a week ago showed businesses are still confident and slack in the economy is being chewed up more quickly, but firms are girding for a period of soft growth amid worrisome signs from abroad, and “possible spillover effects in Canada.”

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