Bank of Canada rate hike now more distant

OTTAWA : Bank of Canada Governor Mark Carney, in his first remarks since the recent global turmoil began, backed away

Published August 19, 2011 Updated August 19, 2011 06:33pm

2 min

By Abdul Ahad

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Following are hints to his thinking, which he provided in testimony before a rare summer meeting of a parliamentary committee on Friday.

LIKELIHOOD OF DELAYS

* In May the central bank had said monetary stimulus would be "eventually withdrawn"; in July it said it would be "withdrawn" as long as growth continued; he now spoke of "the possible withdrawal of any degree of monetary stimulus".

* Says the bank will be "prudent" on any withdrawal.

* Several downside risks to the July Monetary Policy Report have been realized.

* Downgrades second-quarter growth forecast from 1.5 percent to "minimal to slightly negative growth".

* Considerable external headwinds "are now blowing harder".

* There is "a little tightness in financial conditions."

* The "persistent strength" of the Canadian dollar is compounding the effect of sluggish US demand.

* Delicate European debt situation hasn't yet been fully addressed.

ARGUMENT FOR EVENTUAL HIKE

* Says Bank of Canada will not be constrained by the US Fed's conditional plan to keep rates low for two years: "We do not outsource monetary policy to the Federal Reserve."

* Renews warning to households taking loans and mortgages that they should bear in mind that rates will not stay low forever.

* The broad outlines of the July Monetary Policy Report projections still hold.

* Still expects growth to accelerate in the second half of the year.

* Output gap is only 1 percent.

* July inflation numbers are consistent with forecast.

* Commodity prices to remain relatively elevated.

* Sees reasonable but not torrid US growth

DOESN'T RULE OUT RATE CUTS

* Does not specifically speak about rate cuts, which are currently priced into the market but does conclude his introductory remarks by saying "the bank has a wide range of tools and policy options that it will continue to deploy as appropriate."

* Still sees growth in the United States, Europe and Canada.

Background:

* Bank of Canada was the first among the Group of Seven leading industrialized nations to raise its target overnight rate, increasing it three times in 2010, to 1 percent.

* Its remaining rate decisions this year are Sept. 7, Oct. 25 and Dec. 6.

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