Carney May Raise Canada Lending Rate and Signal Slower Pace of Tightening

The Bank of Canada will probably raise its benchmark lending rate for a second month today and may use an accompanying statement to downplay the need for future increases on signs that economic growth is slowing.

Governor Mark Carney will raise the target rate for overnight loans between commercial banks a quarter point to 0.75 percent in the decision at 9 a.m. New York time, say all 20 economists surveyed by Bloomberg News. The statement may also cut the bank’s growth forecast for the second half and add a reference to risks of slower U.S. growth, economists said.

“They will raise rates and grumble about the outlook -- that is the pattern,” said Sheryl King, head of Canadian economics and strategy at Merrill Lynch Canada in Toronto. “They are very worried about growth in the rest of the world, especially the U.S.”

The bank’s June 1 increase was the first in the Group of Seven after last year’s global recession, and Carney has said future moves aren’t “pre-ordained.” Canadian economic data since then have been mixed: Economic growth stalled in April, while job creation was almost five times stronger than expected in June.

Economists surveyed by Bloomberg predict Carney will raise rates again in September before pausing at one of two meetings in the fourth quarter, when economic growth may slow to a 3.1 percent pace instead of the 3.5 percent the bank predicted in April.

‘Lot of Uncertainty’

“There will be a lot of uncertainty about whether the U.S. economy will slow and augment the risks that are already out there in Europe,” said Michael Gregory, an economist at Bank of Montreal in Toronto. This month, Gregory reduced his forecast for the central bank’s rate at the end of this year to 1 percent from 1.25 percent.

Ireland yesterday had its credit rating cut one level to Aa2 by Moody’s Investors Service, which cited a “significant loss of financial strength” and the cost of bank bailouts. The Bank of Canada cited “recent tensions” and “the possibility of renewed weakness in Europe” in its June interest rate statement.

In the U.S., consumer confidence fell in July to the lowest level in a year, according to the Thomson Reuters/University of Michigan preliminary index of consumer sentiment. The U.S. Federal Reserve and the European Central Bank will keep their key rates at record lows this year, according to Bloomberg economist surveys, and the Reserve Bank of Australia signaled July 6 it’s prepared to refrain from further increases in coming months as signs mount that economies around the world will slow.

Sustain Shift

Executives at Canadian auto-parts maker Linamar Corp. and electricity producer TransAlta Corp. say Carney should remain cautious about rate increases to sustain a shift from an expansion led by government stimulus to one led by private spending. Finance Minister Jim Flaherty has said he’s ending the second year of emergency stimulus next March.

“You are seeing so many companies being conservative with their cash right now,” Linda Hasenfratz, Linamar’s chief executive officer, said in a July 9 telephone interview. “I don’t think you want to do anything rapidly, you want to be cautious in potentially uncertain times.”

The central bank’s rate-setting panel said in a June 21 report that the country’s financial system faces a higher level of risk than at the end of last year because of global strains, including concerns that countries are taking on too much debt amid an unbalanced economic recovery.

Blow Lid Off

Canada’s housing market, which helped lead the country out of recession last year, has cooled. Housing starts fell for a second month in June, and building permits fell 10.8 percent in May.

“The rate of economic growth is something that doesn’t support eight rate hikes a year,” said Eric Lascelles, chief economics and rates strategist at TD Securities in Toronto.

The bank’s statement today will probably retain language saying there’s no set path for interest rate increases, said Lascelles and Paul Ferley at Royal Bank of Canada.

“Each meeting will weigh out the risks,” Ferley said. “They will probably reiterate that line: ‘Don’t take it as a given that we are just going to continue to take rates higher.’”

The bank’s June 1 statement said that “any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.”

The central bank also said that inflation will be “slightly higher” than its 2 percent target in the next year. Even with the recent job gains, there’s little evidence inflation is becoming a bigger risk than the damage to the economy from rate increases that could drive up Canada’s dollar, said Peter Dungan, an associate economics professor at the University of Toronto. Canada’s dollar has risen 5.6 percent against the U.S. dollar in the past year, threatening shipments of industrial goods to Canada’s largest trade partner.

“If they raise by a quarter point every meeting we would be up 2 percentage points a year from now -- that would just blow the lid off the Canadian dollar,” Dungan said.

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net.