advertisements

Wednesday, March 24, 2010

Higher Interest Rates

Canadians could be facing higher interest rates sooner than previously thought as a result of stubborn inflation and stronger economic growth, Bank of Canada Mark Carney said Wednesday.

Carney did not declare higher rates were on the way, but issued his clearest signal to date that his year-old commitment to keep the policy rate at the record 0.25 per cent until July was "expressly conditional" on inflation remaining tame.

In a speech to a business audience, the bank governor noted that both underlying core inflation and economic growth have grown slightly stronger, although broadly proceeding as expected.
The tip-off to economists was that he changed his language on his conditional commitment on interest rates, which has led to historically low rates for both consumers and businesses in Canada and helped the country recover from recession.

"This commitment is expressly conditional on the outlook for inflation," he told the Ottawa Economic Association.

It was the first time Carney has undercut the commitment in such pointed language.
Later, Carney downplayed the significance, joking with reporters that he needed to used different words to keep the media's attention.

But economists said the distinction was significant.
"They still have considerable latitude, but the changes that would be required to their forecast are consistent with hiking rates sooner than markets are anticipating," said Derek Holt, Scotiabank's vice-president of economics. He said Carney may move as early as June 1.

But Holt stressed that Carney's overall message to Canadians is that rates will remain low by historical standards for some time.
"No matter what, we emerge from this with lower rates at the end point of the hiking campaign than in past cycles. He's saying the outlook is clouded with risks and there's a number of reasons to expect growth to be lower than past cycles."

Core inflation - which excludes volatile items like energy - has been stubbornly sticky the past few months, with the index rising to 2.1 per cent in February. That's the first time it has been above the central bank's target of two per cent in more than a year.

And Carney pointed out that the economy has performed better than he thought when the bank issued its last forecast in January, predicting growth of 2.9 per cent this year. Since then, several private sector economists have increased their projections and Carney is expected to do the same at the next scheduled forecast date on April 22.

At a news conference following his speech, Carney warned against reading in too much optimism in his assessment.
"It wasn't that rosy a message," he said. He cautioned that low U.S. demand and the high Canadian dollar, which was trading below 98 cents US on Wednesday but still high by recent standards, were acting as "significant drags" on the economy.

On a longer term basis, Carney's message to Canadians was positively dark, warning that the country needs to address its "abysmal" productivity record and that the world needs to follow through with reforms to address global imbalances, particularly China's undervalued currency.

Carney calculated that unless the country improves its productivity or output per unit of work, Canadians can expect to lose a total of $30,000 in real income over the next decade.
"Canada does underperform," he said. "We are not as productive as we could be. Our potential growth is slowing. Moreover, this is occurring as the very nature of the global economy ... is under threat."

No comments:

Post a Comment