Interest rate hike?

Michael Babad

Globe and Mail Update

Published Tuesday, Mar. 01, 2011 6:48AM EST

Bank of Canada Governor Mark Carney held his benchmark lending rate steady at 1 per cent today, citing a faster-than-expected recovery but one with risks ahead. All in all, the chance of an early interest rate hike now looks less likely.

Still included in the central bank's accompanying statement was the line that "any further reduction in monetary policy stimulus would need to be carefully considered," suggesting Mr. Carney is not priming the markets for an interest rate hike just yet.

The central bank chief warned about the continuing headwinds from a strong Canadian dollar and, now, the recent upheaval in the Middle East and North Africa that has pushed up the price of oil, Globe and Mail economics writer Jeremy Torobin reports. Europe's debt crisis is also a sore point.

"The global economic recovery is proceeding broadly in line with the bank's projection in its January Monetary Policy Report (MPR), although risks remain elevated," the central bank said.

"U.S. activity is solidifying and remains supported by stimulative fiscal and monetary policies. Ongoing challenges associated with sovereign and bank balance sheets will limit the pace of the European recovery and are a significant source of uncertainty to the global outlook. Robust demand from emerging-market economies is driving the underlying strength in commodity prices, which could be further reinforced temporarily by supply shocks arising from recent geopolitical events."

Still, the central bank noted the faster-than-anticipated rebound in Canada and further proof of a rebalancing of the economy.

"While consumption growth remains strong, there are signs that household spending is moving more in line with the growth in household incomes," the statement said.

"Business investment continues to expand rapidly as companies take advantage of stimulative financial conditions and respond to competitive imperatives. There is early evidence of a recovery in net exports, supported by stronger U.S. activity and global demand for commodities. However, the export sector continues to face considerable challenges from the cumulative effects of the persistent strength in the Canadian dollar and Canada's poor relative productivity performance."

Avery Shenfeld, the chief economist at CIBC World Markets, pointed out that there was little new in the comments, which weren't as "hawkish" as some observers were expecting.

"Therefore, a bit negative for the C$ and bullish for the short end of the yield curve, but we're sticking with our view that an upgraded economic outlook in April's policy report will pave the way for a rate hike in May, assuming the C$ settles down a bit before then," he said.

Timing of the next interest rate hike is, as always, the source of much speculation, and markets can probably rule out an early increase given the central bank's comments. Some economists had been calling for a spring increase, others for July, and even for October.

"In the wake of today's statement, markets will pare back bets that a rate hike is in the pipeline in April or May," said Toronto-Dominion Bank senior economist Pascal Gauthier. ... All said, with the added consideration that the U.S. Federal Reserve is expected to bring [quantitative easing] to term by June, a bit longer pause for the [Bank of Canada]until a next hike in July still appears the fairest bet."

Senior economist Michael Gregory of BMO Nesbitt Burns agreed: "There are no indications here that rate hikes are close. We judge that the bank is waiting for evidence that U.S. economic performance is strong and steady enough to ensure that Canadian exports will contribute to Canadian economic growth regardless of the level of the loonie. We've pencilled in a July resumption of rate hikes (after another quarter of data and the end of Fed easing). The wait also gets us through budget season (providing more info on the extent of fiscal consolidation) and mortgage season (providing more info on whether moral suasion and tighter mortgage insurance rules are working to slow household credit growth). Carney & Co. appear in no hurry to act, while keeping their policy cards close to their chest."

Bank of Canada's Mark Carney in no rush to hike interest rates

Michael Babad

Published Tuesday, Mar. 01, 2011 6:48AM EST