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Mark Carney is applauded after delivering his last speech as governor of the Bank of Canada before the Board of Trade of Metropolitan Montreal Tuesday, May 21, 2013. (Paul Chiasson/THE CANADIAN PRESS)
Mark Carney is applauded after delivering his last speech as governor of the Bank of Canada before the Board of Trade of Metropolitan Montreal Tuesday, May 21, 2013. (Paul Chiasson/THE CANADIAN PRESS)

Economy Lab

With Carney set to leave, calls grow for shift in rate stance Add to ...

Bank of Canada Governor Mark Carney is going out quietly.

He will convene the Governing Council a final time this week to review the central bank’s interest-rate setting. The outcome of their deliberations will be released Wednesday, and Bay Street expects few changes from the previous policy statement in April.

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And then that’s it. There’s nothing else on the official agenda before Mr. Carney vacates the Bank of Canada on June 3 and transitions to his new life as head of the Bank of England at the start of July.

It’s not a dramatic departure, considering the celebrity status of Canada’s central bank chief.

But his exit opens the door for a reassessment of the bank’s policies. Some Bay Street analysts are all but begging the Bank of Canada to change things up and drop its long-held bias toward an eventual rate hike.

The benchmark interest rate has been set at 1 per cent since September 2010. The central bank has been suggesting since April of last year that it is uncomfortable with rates so low for so long and would like to raise them, even as the economy deteriorates and price increases slide to the lower end of the central bank’s comfort zone.

Ian Pollick, a fixed-income strategist at RBC Dominion Securities in Toronto, suggested in a research report last week that the Bank of Canada’s message could be getting “stale.”

The tilt toward higher interest rates reflects the Bank of Canada’s unofficial mandate to safeguard financial stability. Mr. Carney wanted to lean against a housing bubble by making sure households understand that interest rates wouldn’t be ultra-low forever. The message got through: credit growth, after surging to record levels, is back where it was a decade ago, increasing in line with incomes.

At the same time, Canada’s economy looks shaky. As Mr. Carney noted in his final speech as governor last week, exports are $130-billion less than they should be, using previous recoveries as a guide.

That’s important because, as Mr. Carney also noted, domestic spending is tapped out.

Economic growth in the near future will depend on exports and business investment. Both could be aided by looser monetary policy; lower interest rates would take upward pressure off the dollar and make it cheaper for companies to borrow.

Few take an interest-rate cut seriously, but a growing number think the central bank could shift its guidance to neutral. In other words, stop suggesting that the next move will be to take borrowing costs higher.

The consensus view on Bay Street and Wall Street is that the Bank of Canada, under incoming governor Stephen Poloz, is poised to leave its benchmark interest rate unchanged for at least a year, and probably longer – a conclusion policy makers have done nothing to dissuade. A year is a long time, prompting the question: Why bother to signal a move of any kind?

There’s evidence that the Bank of Canada’s stance could be impeding economic growth, at least marginally. Mr. Pollick observed that yields on benchmark 10-year bonds, adjusted for inflation, had climbed to their highest since 2010. Core inflation, which the central bank uses to judge where consumer prices are headed, was 1.1 per cent in April compared with 2.1 per cent in April 2012, causing some economists to fret about deflation. The Bank of Canada aims to keep annual inflation at 2 per cent, and generally is comfortable if the rate stays within a range of 1 per cent to 3 per cent.

“There is a very good case for the bank to now stand down from its bias,” Douglas Porter, chief economist at BMO Nesbitt Burns, said last week in a research note.

Yet there also is a very good case for leaving things alone.

Policy makers in Canada and elsewhere are uncomfortable with the level of monetary stimulus they have unleashed. They worry that what is disinflation today could turn quickly into hyperinflation. They worry about asset-price bubbles, and they worry about distorting the economy with cheap money.

The Bank of Canada has achieved a fine balance between stimulus and financial stability. Statistics Canada on Friday will report that Canada’s gross domestic product grew at an annual rate of 2.4 per cent in the first quarter, according to National Bank Financial, which is faster than the central bank was expecting. And there’s no telling how jittery financial markets would react to the surprise of a new message, said John Curran, senior vice-president at Canadian Forex in Toronto. Removing the bias for higher rates would suggest the central bank is losing faith in the economy.

“It’s a good confidence boost,” Mr. Curran said of the central bank’s guidance. “Policy right now is appropriate.”

Follow on Twitter: @CarmichaelKevin

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