Gordon Isfeld
OTTAWA — Even after cutting growth prospects for Canada and much of the world, and noting that household debt remains worrisome, as does Europe, Mark Carney remains among the few voices not crying wolf — at least not yet.
But the Bank of Canada governor still expects growth in the domestic economy — along with other economies — to eventually ramp up, and that the banking and debt problems will be contained in Europe.
As for consumer debt, Mr. Carney sees the gap between household income and spending narrowing eventually.
“While global headwinds are restraining Canadian economic activity, domestic factors are expected to support moderate growth in Canada,” he told reporters Wednesday, following the release of the bank’s quarterly monetary policy report.
That report came one day after policymakers again held their key interest rate at a near-record low of 1%.
“Consumption and business investment are expected to be the primary drivers of growth, reflecting very stimulative domestic financial conditions,” Mr. Carney said.
While the global slowdown has depressed commodity prices, “they remain elevated,” he said, adding that inflation is likely to remain near the bank’s 2% target level.
The Bank of Canada has left its trendsetting rate on hold since September 2010, and is not expected to touch it again until mid or late 2013. As policymakers here continue to lean toward raising borrowing costs, other countries have recently lowered their rates.
That is not something Mr. Carney sees in the cards, saying a rate of 1% is “very low.” He dismissed the view that the lack of action has isolated Canada among other major economies.
“We’re as clear as we’re going to be,” he told reporters.
“We make policy for conditions in Canada … Global monetary policy is not a cut and paste.”
Avery Shenfeld, chief economists at CIBC World Markets, said “in a sluggish, but not disastrous economy, the bank can afford to wait it out at 1%.”
“Whether they end up hiking next year will depend on whether the economy can, in fact, accelerate with interest rates at this level, given what’s going on in the rest of the world.”
Low interest rates were meant to help stimulate the economy coming out of the 2008-09 recession, encouraging spending by businesses and consumers. But while firing up growth, they also caused many households to take on unsustainable debt loads — increasing demand and prices in the real estate market along the way.
“What’s important is the borrowing that’s done, and borrowing will be done both by households and by businesses in Canada, that it is done sensibly by those who can bear the debt,” Mr. Carney said.
What should help consumers, in particular, are the new rules brought in this month by the Ottawa aimed at tightening mortgage lending, he said.
“While we see a better evolution of the gap between household income and spending on consumption, spending on housing … narrows, but it doesn’t fully go away immediately so there is an additional increase, in our view of household debt.”
Concerning Europe, Mr. Carney said “authorities have resolution on taking a variety of measures [to control the debt crisis and move toward a stronger monetary union]. They have other options.”
But, he said he would not characterize containment of the euro crisis as “wishful thinking,” adding: “Containment is a pretty low bar.”
In its Wednesday report, the Bank of Canada adjusted economic growth projections made in its April’s policy document.
The bank lowered its outlook for Canada, saying expansion will be limited to 2.1% this year and 2.3% in 2013. That’s down from the previous estimate of 2.4% for both years. “There’s no harm in hoping for something better in 2013, as long as you’re not making interest rate decisions based on that hope,” CIBC’s Mr. Shenfeld said.
Meanwhile, the outlook for the global economy was also downgraded. The bank now expects growth of 3.1% this year, compared to its previous estimate of 3.2%. For 2013, the forecast is also for 3.1% expansion, down from 3.4%.
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