No actual change, but Carney expected to soften language on future rate hikes

By The Canadian Press

OTTAWA – The Bank of Canada is widely expected to keep interest rates unchanged later this morning, but that doesn’t mean governor Mark Carney won’t make significant changes to his monetary policy approach.

With private sector economists taking turns ratcheting down expectations for growth this year and next, Carney is expected to follow suit with his own revisions Tuesday.

And the weaker growth profile gives the governor the opportunity to tone down what now appears an overly-hawkish stance on interest rates to a more neutral position.

For months, Carney had been posting the now familiar mantra that “some modest withdrawal of the present considerable monetary policy stimulus may become appropriate” some time in the future.

To economists, that meant Carney believed his next move — whenever it comes — will be to raise rather than cut the one per cent trendsetting rate that has been responsible for some of the lowest borrowing costs Canada has seen in many decades.

Economists have noted that the policy rate, while needed to anchor a weak economy, has also contributed to an unsustainable run-up in home prices and risky levels of household debt.

In a recent revision, Statistics Canada has placed household credit market debt at 163 per cent of income, about the level reached in the United States before the housing crash of 2007-08.

Scotiabank economist Derek Holt said the signal from the Bank of Canada that it will tone down its hawkish language came last Monday, when Carney dropped the sentence from a speech he gave in British Columbia. The dollar fell more than half a cent the next day.

“If the (bank) felt that the speech had been misinterpreted by markets … then it would have had the following day to correct misperceptions,” Holt explained in a note to clients. “The fact that it chose not to do so only reinforced the likely intent.”

Desjardins economist Jimmy Jean cites three factors for why Carney is likely to turn dovish. Inflation is below expectations, the economy is underperforming and businesses are telling anyone who asks, including the Bank of Canada’s business outlook survey of last week, that they are paring down investment plans.

In July, the bank said it expected the economy to grow by 2.1 per cent this year, 2.3 next year and by 2.5 in 2014.

While modest, even that growth profile now looks optimistic after consecutive sub-two-per-cent quarters in the first half of the year, with the third quarter, ending in September, looking no stronger.

The Conference Board said Monday it expects growth to average only 1.8 per cent this year, near where most forecasters now have the economy.


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