Economy down, but Carney unlikely to change interest-rate policy

OTTAWA – Canada’s sudden loss of economic momentum during the summer probably wasn’t enough to sway the Bank of Canada to alter course when it makes its interest rate announcement at 9 a.m. Eastern time.

The loonie rose 0.1 of a cent to 100.61 cents US shortly before the central bank’s announcment, as currency traders expected the bank to leave its key rate at one per cent, reflecting weak global economic conditions.

The consensus among economists was almost as solid that bank governor Mark Carney, who recently announced he will leave for England in June, will keep in place a policy bias saying that interest rates will need to rise “over time.”

The “over time” language was added by Carney in October and was interpreted as a marginally less hawkish view on rate hikes.

Noting that the Bank of Canada changes direction about as swiftly as an ocean liner, most economists believe it is too soon for another signal shift.

“We do not foresee any material change to the rhetoric, but the assessment of recent performance and the current balance of risk will be key to watch for any potential shift in bias,” said Jimmy Jean of Desjardins Capital Markets.

Still, there is no doubt Carney’s fervour for moving rates up has likely cooled.

The C.D. Howe Institute’s informal policy council recommended Thursday that rates not only stay put today, but that they should remain at one per cent one year from now. That is the first time since March that the panel of economists has judged that conditions should remain unchanged 12 months out.

The reason for the more dovish talk, of course, was Friday’s disappointing 0.6 per cent gross domestic product performance, well off the central bank’s call of a one per cent advance.

Worst still, two long-standing pillars of strength — business investment and housing — both contracted sharply.

The key takeaway from the GDP report was that the economy’s output gap is not closing, but growing, giving the central bank little reason to apply the brakes.

On Monday, Finance Minister Jim Flaherty characterized the slowdown as temporary, but also cautioned that Canadians should not expect dramatic growth going forward.

“It’s a time in which we are going to be buffeted, there’s going to some months better than others, but overall we will be OK with modest growth next year,” he said.

That’s been the case for more than two years now, which is as long as the Bank of Canada has kept the policy interest rate moored at one per cent.

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