Better economic conditions likely dash any chance of interest rate cut

By Julian Beltrame, The Canadian Press

OTTAWA - Any thoughts Bank of Canada governor Mark Carney might have had about cutting interest rates further today likely flew out the window after a recent spate of relatively good economic news.

The Bank of Canada will announce its policy setting — which influences short term interest rates — at 9 a.m., and the opinion appears virtually unanimous there will be no change from the current one per cent perch.

That should keep in force a credit landscape that has seen borrowing rates across the spectrum of terms and conditions among the most generous in memory.

In fact, last week the Bank of Montreal offered the first 2.99 per cent five-year, fixed mortgage rate in modern Canadian history, forcing other banks to follow suit with similar actions.

In essence, the market is beating the central bank to the punch with credit easing, said Derek Holt, vice-president of economics with Scotiabank.

But there are other reasons analysts — with few exceptions — believe Carney will be loathe to move off one per cent, where he's been since September 2010.

That's because as weak as conditions are, with Europe still at risk of plunging the world into another recession, the economic indicators have been stronger than Carney thought they would be three months ago.

Then, the bank governor projected growth in the third quarter of 2011 would come in at a weak two per cent and the fourth at a barely visible 0.8 per cent. The third quarter is already in the books at 3.5 per cent and the fourth looks closer to two per cent, however.

As well, the resilience of oil prices to the global slowdown likely means inflation in 2012 will be a little stronger than the bank had been counting on.

"The combination of perhaps upward revisions to growth and inflation forecasts ... might be the thing that totally takes rate cuts off the table," said Holt.

There are some who still believe Carney's next move will be to trim interest rates, including Carleton University economist Nicholas Rowe, a member of the C.D. Howe Institute's monetary policy panel, and David Madani of Capital Economics.

Madani expects Carney will take the policy rate to 0.5 per cent by the end of the year. He has a darker than most view of the economy — with growth a mere 1.5 per cent this year, and the unemployment rate rising half-a-point to eight per cent by year's end.

"Although (the bank) ... will no doubt highlight that U.S. economic activity has improved somewhat, even they would admit that a sustained recovery is far from assured, particularly considering Europe's recession and the heightened risk of another global banking crisis," Madani wrote in a note to clients.

But Madani also said Carney is likely to wait out at least one more policy date before making his move.

The main news coming out of Tuesday's announcement, and Wednesday's monetary policy review — the bank's new forecast for the global and Canadian economies — is whether Carney sees the stronger-than-expected second half of 2011 as a precursor for 2012, or simply a blip that merely delayed the onset of weaker growth.

In the previous policy review, the central bank had predicted growth would come in at 2.1 per cent in 2011, 1.9 per cent in 2012, and 2.9 per cent in 2013.

With 2011 already in the books — although all the data points are not yet known — the expectation is that growth was more likely in the moderate 2.4 per cent range. But that may not change Carney's view that 2012 will be even weaker, with considerable downside if Europe's debt issues metastasize.

In past policy announcements, Carney has made it clear he views the current one-per-cent setting to be sufficiently accommodative for the current, slow-growth economy. Easy credit conditions stimulate spending and expansion in the economy.

Holt said it would likely take a European implosion for Carney to cut rates further.