Canada May Keep Lending Rate at 0.25%, Repeat Pledge

Canada May Keep Lending Rate at 0.25%, Repeat Pledge (Update1)

By Greg Quinn

Jan. 18 (Bloomberg) — The Bank of Canada will probably keep its benchmark interest rate at a record low tomorrow and repeat a pledge to leave it unchanged through June.

The target rate for overnight loans between commercial banks will remain at 0.25 percent, where it’s been since April, according to all 26 economists surveyed by Bloomberg. The decision will be announced tomorrow at 9 a.m. New York time.

Governor Mark Carney has said Canada’s economy will operate with “slack” through the middle of 2011 as exports are curbed by the Canadian dollar’s 21 percent gain against its U.S. counterpart in the past year. Inflation slower than the central bank’s 2 percent target means Carney is unlikely to break his pledge to freeze rates until the second half of the year.

“The Bank of Canada has a bit of room to keep policy rates low over the next several months,” said Tom Nakamura, a fixed- income portfolio manager for AGF Investments Inc. in Toronto, who helps oversee about C$6 billion ($5.83 billion). “Economic activity we have seen so far is positive, but not enough to change the bank’s forecast for growth and inflation.”

Investors expect no rate increase until September, yields on overnight index swaps indicate. The yield on the contract due in September traded at 0.36 percent at 12:39 p.m. Toronto time, and the October contract traded at 0.40 percent.

Consumer spending led by home purchases will lead a recovery, allowing Carney to raise rates in the third quarter, said Meny Grauman, a senior economist at Canadian Imperial Bank of Commerce in Toronto.

‘Keep Commitment’

“They would like to keep that commitment and there’s no reason why they shouldn’t be able to,” Grauman said.

Carney will probably raise the key rate to 0.75 percent in the third quarter and to 1.5 percent by the end of the year, according economists surveyed by Bloomberg News. A separate survey for the U.S. shows economists don’t expect the Federal Reserve to raise its benchmark rate to 0.75 percent until the fourth quarter.

Low mortgage rates helped push existing home sales to a record in December, the Canadian Real Estate Association said Jan. 15. The average five-year mortgage rate was 5.49 percent last week and 5.25 percent in May, the lowest since 1951.

A 19 percent jump in home prices over the past year hasn’t pushed the inflation rate above the central bank’s target. Consumer prices rose 1 percent in November, Statistics Canada said Dec. 17. The so-called core rate, which excludes gasoline and seven other volatile items, slowed to 1.5 percent.

‘Cold Water’

Bank of Canada Adviser David Wolf said in a speech last week it’s “premature” to conclude there’s a bubble in the housing market, and a rate increase to slow it would “be dousing the entire Canadian economy with cold water, just as it emerges from recession.”

Canada “dug quite a hole” and the recovery “is not that solid,” said Dale Orr, head of Dale Orr Economic Insight in Toronto, in a telephone interview.

The strong currency and weak U.S. demand for the country’s cars and lumber will limit economic growth to 3 percent this year after last year’s 2.4 percent contraction, the central bank said in October. The bank will issue an updated detailed forecast on Jan. 21.

The Canadian currency appreciated 0.4 percent to C$1.0251 per U.S. dollar today, from C$1.0291 on Jan. 15. One Canadian dollar buys 97.5 U.S. cents. In October, the central bank raised its assumption for where the currency will trade through 2011 to 96 U.S. cents from the 87 U.S. cents it had assumed in July.

Restrained Spending

Consumer spending will be restrained because of job losses in provinces such as Alberta and Ontario, said Jeremy Reitman, president of Reitmans Ltd., a chain of women’s clothing stores.

Cautious spending by Canadians “is going to persist” this year, Reitman said in an interview from Montreal. “We are still very price conscious in Canada due to the lack of disposable income.”

The country lost 239,700 jobs last year, the first decline since 1992, and 323,400 jobs since employment peaked in October 2008. Prime Minister Stephen Harper this month said that restoring job growth will be one of his main challenges.

Canadian companies surveyed by the Bank of Canada expect the recovery to be gradual, the central bank reported Jan. 11. They also reported near-record optimism about future sales growth and continued easing of credit conditions.

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net.

Last Updated: January 18, 2010 12:52 EST

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