Mark Carney is taking a cautious approach to raising interest rates, weighing Canada’s powerful economic rebound against the uncertainty of an “increasingly uneven” recovery across the globe.
The Bank of Canada Governor became the first central banker in the Group of Seven to raise borrowing costs since the financial crisis and recession, increasing the benchmark overnight rate Tuesday by one-quarter of a percentage point to a still exceptionally low 0.5 per cent.
Policy makers will keep an eye on Europe’s troubles, and won’t move more aggressively than they see fit, the Bank of Canada suggested, even though the economy is rebounding rapidly and inflation will likely exceed its 2-per-cent target this year. Much like in 2008 when the U.S. financial crisis pulled Canada into recession, the country’s economic health depends in large part on policy makers in other countries successfully containing homemade problems.
“Interest rates are incredibly low, given the strength of the domestic economy, but the global story is where it’s at right now,” Eric Lascelles, chief economic strategist at TD Securities in Toronto, said in an interview. “The level of uncertainty suggests there’s not a lot of confidence in the forecasts.’’ The open-ended nature of the announcement sparked a fall in the Canadian dollar and yields on two-year government bonds as investors pulled back their bets on what they had expected might be a series of uninterrupted rate hikes going forward.
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Still, the central bank said its decision leaves “considerable monetary stimulus in place,” and that the effects of Europe’s troubles on Canada have been limited to a “modest” drop in commodity prices and somewhat tighter financial conditions.
By comparison, Canada’s benchmark rate now matches that of Britain and is only half as much as the European Central Bank’s 1 per cent, so there’s a lot of ground to cover before borrowing costs are at a level economists consider “neutral.” At the same time, even the Reserve Bank of Australia, which started tightening last fall, kept its benchmark rate at 4.5 per cent this week. It, too, cited “various factors” in the world economy that “need to remain under review,” among other things.
