Carney on Rates: No 'imminent' Changes

Excerpted from The Globe and Mail
October 24, 2012

Carney on rates: no 'imminent' changes

By KEVIN CARMICHAEL

Central bank's latest quarterly economic outlook projects steady, if unspectacular, growth through 2014

Bank of Canada Governor Mark Carney Wednesday laid out his plans for interest rates in the clearest possible terms, saying he foresees no "imminent" changes, but that "over time, rates are more likely to go up than not."

Mr. Carney made the comments after releasing the central bank's latest quarterly economic outlook, which projects steady, if unspectacular, growth through 2014 at a pace that's a bit faster than that which policy makers believe the economy can sustain without stoking inflation.

However, Canada's economy has grown slower this year than the central bank was expecting, putting downward pressure on inflation and negating the need for higher interest rates immediately.

"The case for the adjustment of interest rates has become less imminent," Mr. Carney said at a press conference in Ottawa.

Still, the Bank of Canada chief was unusually clear in stating that the borrowing costs are headed higher. He said it is "important" for the general public and investors to realize that Canada is pushing up against its non-inflationary production capacity; its economy is in an expansion phase, not a recovery; and that elevated household debt levels represent a significant threat to the financial system.

"Over time, rates are more likely to go up than not," Mr. Carney said.

Every October, policy makers revise their estimate of how fast Canada's economy can grow without stoking inflation. The Bank of Canada left its estimate of "potential growth" unchanged, pegging potential growth in 2012 at 2 per cent, in 2013 at 2.1 per cent, in 2014 at 2.2 per cent and in 2015 at 2.1 per cent.

The central bank's estimate of the economy's speed limit explains why policy makers remain inclined to lift interest rates. They predict Canada's gross domestic product will grow at an annual rate of 1.8 per cent in the fourth quarter, and speed up to 2 per cent in the first quarter of 2013.

By the second half of next year, the Bank of Canada predicts that economy will be growing at a pace of 2.5 per cent, a forecast that will reinforce predictions that the central bank finally will boost borrowing toward the end of 2013.

"We are in an expansion, not a recovery, which is unique in advanced economies," Mr. Carney said, The risk posed by household debt might be dissipating. The Bank of Canada says that its repeated warnings about the perils of elevated household debt could be sinking in.

Noting that consumer spending has been "moderate" of late, the central bank is cautiously suggesting that Canada's credit binge could be ebbing.

"It is possible that the elevated level of household debt is beginning to induce a more cautious attitude among Canadian households," the Bank of Canada says in its third-quarter Monetary Policy Report.

The more sanguine take on the trajectory of household debt was the biggest surprise in a document that was largely previewed in Tuesday's policy statement, which the central bank used to harden its resolve to raise interest rates within the next couple of years.

For the better part of two years, Bank of Canada Governor Mark Carney and other officials have been warning Canadians to go easy on credit, reminding audience that borrowing costs eventually will rise. As well as custodian of the economy, the central bank also sees itself as the guardian of financial stability, and a wave of personal bankruptcies and foreclosures could cripple the banking system.

Canadians have every incentive to borrow. Policy makers left the benchmark rate at an ultra-low setting of 1 per cent for a 25th consecutive month on Tuesday. Banks appear willing to lend, especially government-backed mortgages, and higher commodity prices are boosting national wealth.

However, the ratio of household debt to income has climbed above 160 per cent, a level that the central bank considers a threat to the financial system – and by extension, the biggest domestic risk facing the country's economic prospects. The central bank said for the first time on Tuesday that household debt could prompt an interest-rate increase if Canadians fail to curb their appetites for credit on their own.

The Bank of Canada notes in its report that household credit growth has stabilized at a rate of around 5.5 per cent since the start of the year, a slower pace than the historical average of about 8 per cent.

A more cautious consumer comes at a price: slower economic growth. The central bank sees little change in household spending over the rest of the year and into 2013, "despite the supportive impact of improved financial conditions and higher terms of trade in recent months." The central bank now expects consumption to grow "slightly" slower than incomes.

That will rob Canada of its primary source of economic propulsion since the recession, putting more pressure on businesses to boost investment. The central bank says it will be 2014 before exports return to pre-recession levels, as global demand remains diminished because of a recession in Europe, tepid growth in the U.S. and weaker demand in China.