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Canadian interest rates will stay low, but Bank of Canada says it overestimated growth


OTTAWA—Canadians can expect current low borrowing costs to continue for the near future after the Bank of Canada Tuesday signaled that slower-than-expected economic growth and a shift in consumer buying habits have taken any urgency out of raising interest rates.Mark Carney, the central bank governor, kept the bank’s trend-setting overnight interest rate at 1 per cent as expected. It’s been over two years since the bank raised the key rate.

“Caution about high debt levels has begun to restrain household spending,” Carney said in a statement accompanying Wednesday’s rate decision. The governor has been urging Canadians for months to stop running up record levels of debt. “The Bank expects trend growth in household credit to moderate further,” Carney added.

This shift, along with weaker-than-forecast domestic economic activity and a flat inflation outlook, led the bank to revise its usual statement on its future strategy to reflect the view that higher rates are not likely any time soon. In a major shift in outlook, the bank said any attempt to push up borrowing costs to head off a burst of inflation “is less imminent than previously anticipated.”

The bank said economic growth in Canada is expected to be less pronounced than Carney predicted in October. At that time, the bank forecast growth in 2012 would come in at 2.2 per cent, but it now says the final tally for last year will come in at 1.9 per cent. For 2013, the bank now says the economy will expand at 2 per cent, down from the 2.3 per cent predicted a few months ago.

The slower-than-forecast growth in Canada stemmed from “weaker business investment” and weak demand for Canada’s exports — as well as a bit more caution on the part of Canadian consumers, the bank said.

The global outlook is not as upbeat as expected a few months ago, with economic expansion in the U.S. continuing at a gradual pace and Europe mired in recession, Carney said. While growth in China is improving, the economies of some other major emerging market countries have slowed.

For Carney, who leaves the bank in mid-2013 to take over the top job at the Bank of England, it was one of his last few interest-rates settings at Canada’s central bank. The next scheduled date for announcing the overnight rate target is March 6.

thestar.com – Business