Canada signals rate hikes
TORONTO, Canada — CANADA’S central bank left its key interest rate unchanged at one per cent yesterday but said interest rates may need to start rising soon.
The Bank of Canada said some “modest withdrawal of the present considerable monetary policy stimulus may become appropriate”.
The central bank was vague on the timing.
Bank of Canada Governor Mark Carney painted a brighter picture of the Canadian and US economies in his statement.
“External headwinds facing Canada have abated somewhat, with the US recovery more resilient and financial conditions more supportive than previously anticipated,” the bank said.
Carney raised his 2012 growth forecast for Canada to 2.4 per cent from two
per cent.
The Canadian dollar jumped 0.95 of a cent to 100.98 US cents after the bank signalled rate hikes might be coming.
The bank’s more hawkish tone was a mild surprise.
Avery Shenfeld, chief economist at CIBC World Markets, said the bank seems to be thinking about a small string of rate hikes at some point late this year, but noted that there’s enough doubt in that forecast that it also says that the timing and magnitude of tightening will be “weighed carefully”.
Shenfeld said he doubts that growth will be firm enough to justify the rate hikes that the bank now sees itself delivering.
The central bank has left the key rate unchanged for 13 consecutive meetings since September 2010. In the summer of 2010 Canada became the first nation in the Group of Seven to raise interest rates since the crisis began.
Canada’s commodity-rich economy has fared better than other nations in the G-7, which groups industrialised nations. There was no mortgage meltdown or sub-prime lending crisis in Canada, and its banks are rated among the soundest in the world.
But there are fears of a housing bubble fuelled by historic low interest rates. The central bank said household debt remains the biggest domestic threat to the Canadian economy. The bank has been reluctant to raise rates for fear it may send the Canadian dollar soaring, which would hurt manufacturing in central Canada.