Interest rates to rise before end of 2014, governor Mark Carney suggests

OTTAWA – Bank of Canada governor Mark Carney is suggesting interest rates will likely rise before the end of 2014.

by Julian Beltrame

OTTAWA – Bank of Canada governor Mark Carney is suggesting interest rates will likely rise before the end of 2014.

It’s one of the clearest indications Carney has given as to when he might raise the bank’s key benchmark, which has been held at one per cent for more than two years.

Responding to a question in the Commons finance committee Tuesday afternoon, the bank governor said the bank’s current thinking was that monetary policy will need to be tightened before 2015.

Last week, Carney inserted the phrase “over time” to give markets guidance on when the bank’s trendsetting rate might be increased. Tuesday’s response was somewhat more detailed, but still pointed to no immediate plans.

“We have in this projection … some modest withdrawal of monetary policy stimulus over the course of the projection, which runs until the end of 2014,” he said. “In other words in advance of 2015.”

Carney added that whenever he does move, it will be when global and domestic factors dictate. And he reiterated his recent guidance that he will also take into account household debt in his decision.

At the moment, he said the country still needs super-low interest rates to stimulate the economy and create jobs.

Canada may have recovered all the jobs it lost in the recession, and added an additional 380,000, he said, but the economy still has a way to go before returning to what would be considered full employment.

“We are in still in position where there are more Canadians who want to work than are working, and the level of involuntary part-time (workers) is still elevated,” he explained.

“They illustrate a degree of slack that still exist in the labour market, which is one reason our monetary policy continues to be and should be accommodative.”

Most private sector economists have pencilled in late 2013 or early 2014 for the first bank action.

The bank governor was appearing before the committee to explain his latest economic outlook released last week that projected growth of 2.2 per cent for this year, followed by a 2.3 per cent advance in 2013 and 2.4 in 2014.

That is slightly more optimistic than the economists’ consensus estimate handed to Finance Minister Jim Flaherty on Monday for the government’s fall update projections, which will be released in a few weeks.

Carney continued to blame global factors for most of the drag on the economy. But he said government restraint is also contributing to slower growth, although not as much as some have suggested.

He estimated the public sector will contribute about 0.3 percentage points to growth in 2013 and 2014. That’s about half the historic level and well down from when Ottawa and provincial governments were pumping billions into the economy during the 2008-09 recession and early stages of the recovery.

“So it’s positive but not as much as previously,” he said. Government restraint was a modest 0.2 percentage point constraint in 2012, however, the bank report shows.

Carney even ventured to assess the economic impact of the destruction caused by superstorm Sandy, which early estimates put at $20 billion.

While the economy will take a hit immediately, over the long term needed reconstruction in the eastern U.S. states will largely recoup the losses.

“There are activities that can never be redone, for instance a visit to a restaurant. Then there is restructuring (which creates economic activity). In general, it tends to be a relatively negligible impact over time,” he said.




Browse

Interest rates to rise before end of 2014, governor Mark Carney suggests

  1. Yeah….right.
    In 2013, uncertain world economic conditions will be felt. Something or another will happen somewhere and then interest rates will have to stay low for another year.

    They keep selling this, “interest rates will go up” schtick to stop people from taking on debt.
    Ha!
    Nice one.

    • Low or no interest also means no investment. What is Carney thinking?

      • Low interest rates normally encourage investment because guaranteed investments pay so little. The reason many investors and businesses are hoarding cash is because they have no faith in the economy. They expect deflation, which means they are still better off with even negative real interest rates.

        According to the Keynesians, the central banks need to raise their inflation target (to around 4%, e.g.) in the medium term (say 5 year commitment.) That way investors would rather get rid of their money than hold onto it. Also without the anti-inflation Sword of Damocles hanging over their heads, they don’t have to worry about an inflation hawk jacking up interest rates too fast and killing the economy and the return on their investments. (With a medium inflation target, the economy will go into full recovery producing a bull stock market; then the central bank can gradually ease up interest rates back to normal levels.We had 4% inflation in the 1980s and more than double the GDP growth we have now.)

        • Low interest rates do NOT encourage investment.

          What are YOU thinking?

    • Yes, Carney’s forecast and confidence in the economy is absurd. The US is facing stiff austerity measures that will put the economy back in recession. Many economists say its economy is in a liquidity trap, where the interest rate needed to bring about a recovery is below zero. The eurozone crisis gets worse by the minute (with harsh self-defeating austerity measures in crisis countries.) This economic quagmire will likely be around for a long time (Japan is in a similar one with interest rates at or below 1% for 17 years now…)

Your email address will not be published. Required fields are marked *