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Can’t wait too much longer to raise borrowing costs: Carney
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Toronto Star- OTTAWA—Bank of Canada Governor Mark Carney is hinting that he can’t wait too much longer before the central bank begins to end the era of extra-low borrowing costs in Canada.
Citing slow United States economic growth and the risks from the spreading debt crisis in Europe, the Bank announced as expected Tuesday that it would keep its influential overnight interest rate at 1 per cent.
But with inflation fears multiplying, Carney warned Canadians again that he will before long push up interest rates to ward off a round of runaway price increases.
Canadians may get more signals from Carney on Wednesday, when he releases a quarterly forecast.
On Tuesday, market watchers combing through Carney’s statement said the Bank is laying the groundwork to begin raising borrowing costs at one of its planned rate-setting dates later this year—if not in September then in October or December.
That’s because Carney dropped the word “eventually” from his usual warning that interest rates in Canada will in time have to go up.
“The clock is running out on ultra-low interest rates in Canada,” CIBC World Markets Senior Economist Avery Shenfeld commented.
The prospect of higher interest rates, which attract Canadian dollar-denominated investments, contributed to an increase in the value of the loonie on exchange markets. The Canadian dollar closed at $1.0517 (U.S.), up from $1.0429 the previous day.
Since last fall, Carney has been warning consumers that the central bank’s trend-setting overnight rate could not stay indefinitely at 1 per cent, a near-historical low meant to help Canada escape the lingering impact of the 2008-09 recession.
But risky international conditions have forced the Bank to put off increases in domestic borrowing costs so far this year and are still a concern.
“The Bank (of Canada’s) projection assumes that authorities are able to contain the ongoing European sovereign debt crisis, although there are clear risks around this outcome,” Carney said in a statement.
Business conditions in Canada will strengthen during the rest of this year, he predicted, despite the weakness in exports caused by the high Canadian dollar.
Overall, the Bank projects the economy will expand by 2.8 per cent in 2011 after impressive 3.3 per cent output growth last year.
This has contributed to growing concerns about inflation.
While Europe and the U.S. face challenges, growth in emerging-market economies, particularly China, remains very strong. The result is a rise in international demand for commodities, a trend that is contributing to “broader global inflationary pressures.”
In Canada, the consumer price index will remain above 3 per cent in the near future because of higher food and energy costs, Carney said. Core inflation, a measure of price increases that strips out volatile fresh food and gasoline prices, is close to the Bank’s 2-per cent target but has been “slightly firmer” than expected, Carney said.
Under these conditions, the central bank would normally be likely to say there is no more need for low interest rates. But Carney’s options are still being constrained by external events.
Tuesday’s announcement said economic expansion in the U.S., which takes 70 per cent of Canada’s exports, is being held back by high levels of unemployment and debt-strapped households.
And Carney said the need to slash government spending in European countries caught in the current debt crisis will hinder an economic pickup. “Necessary fiscal austerity measures in a number of countries will restrain (European) growth” for the near future, he said.
The next interest-rate announcement is Sept. 7.
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