Europe's deepening troubles, a broad slowdown in emerging markets and a plodding U.S. recovery are pushing Canadian interest-rate hikes farther down the road, but not off the table.
At a decision Tuesday in Ottawa, Bank of Canada Governor Mark Carney left his main interest rate at 1 per cent for the 14th consecutive decision, extending the bank's longest pause since the 1950s. But even as he sounded a more cautious tone, Mr. Carney indicated he remains worried about high personal debt and hinted he is still eager to tighten policy as soon as conditions allow.
In April, Mr. Carney boosted his outlook and warned rate hikes could soon "become appropriate" if things kept improving. On Tuesday, he did not do a full U-turn and signal that the deteriorating global backdrop might actually cause him to cut rates, as some investors had come to expect. Nonetheless, his latest statement marks at least a mild reversal, on a couple of fronts.
For instance, after declaring in April that the European crisis had moved "from the acute to the chronic," on Tuesday Mr. Carney acknowledged that the global outlook has "weakened in recent weeks," and said "risks around the European crisis are materializing," fuelling a "sharp deterioration in financial conditions." Significantly, he also noted that emerging markets like China and India are "slowing a bit faster and a bit more broadly than had been expected."
As a result, he said, "modest global momentum and heightened financial risk aversion" have lowered commodity prices -- a sign of concern about some of Canada's most lucrative exports.
"There's a limit to the insulation of the Canadian economy from the rest of the world," said Denis Senecal, vice-president and head of fixed income investing at State Street Global Advisors (Canada) in Montreal. "It looks like the slowdown could hurt Canada more than other countries."
Indeed, all of this is occurring at a time when the U.S., Canada's chief export market, "continues to expand at a modest pace" and is not expected to be able to fully offset tepid growth overseas.
The heightened concern about global growth was on display in other corners Tuesday.
Amid a European crisis that has worsened measurably in recent days, Mr. Carney and Finance Minister Jim Flaherty took part in an emergency conference call with policy makers from the Group of Seven club of rich economies, in the latest effort to push Europe to agree on a solution.
And the Reserve Bank of Australia cut its benchmark interest rate to its lowest level since 2009, citing "a weaker and more uncertain international environment." While the RBA's policy rate is still much higher than the Bank of Canada's, giving it room to cut, Australia is also a commodity-heavy economy that is taking a big hit as demand from China and other emerging markets cools.
That has some analysts, such as Mr. Senecal, predicting Mr. Carney may eventually ease, too.
But there were several hints from Mr. Carney suggesting that would be an unwise bet.
While acknowledging that Canada's growth in the first quarter was slower than expected -- coming in at a 1.9-per cent annual pace, compared with the bank's estimate of 2.5 per cent -- Mr. Carney said "underlying economic momentum" seems "largely consistent with expectations," suggesting he believes strong job gains in March and April point to a pickup.
Mr. Carney and his team also called domestic financial conditions "very stimulative," and warned that growth in Canada is too tilted towards housing and debt-fuelled consumer spending -- neither of which is seen as a sustainable driver.
Most economists interpreted Tuesday's comments as re-affirming that Mr. Carney is uncomfortable about rates being low for so long, but that the parade of uncertainties could keep him on hold into 2013, or later, as he waits to see if Canada can shrug off the global turmoil.
"They're hinting that they would still like to find a window to raise interest rates and further cool the fire of household borrowing," said Avery Shenfeld, chief economist at CIBC World Markets, "but they're conceding that there are risks the economy won't be strong enough for that to make sense."