Window closing fast on Carney’s itch to raise interest rates

OTTAWA — Bank of Canada governor Mark Carney sometimes speaks like he is itching to raise interest rates.

The reason is that like all central bankers he must worry about inflation and in Canada, households being lured into borrowing more than they should by persistent super-low rates.

In April, with the global economy far from safe and dry, Carney surprised markets with a general upbeat take on conditions and especially the Canadian economy, then went on to drop a big hint.

“In light of the reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the two per cent inflation target over the medium term.”

In bank speak, that told markets to get ready for an upward drift of interest rates in small incremental steps starting in the fall.

But few believe that is any longer possible given the darkening clouds gathering over Europe, with Greece in the midst of both a political and economic crisis, and Spanish banks under stress.

Economists are as unanimous as can be that Carney will leave the trendsetting policy rate — which influences borrowing costs for consumer and businesses — at one per cent today.

The majority believe the next move won’t come until 2013, and only if risks recede.

If there is a change in today’s announcement, they say, it will be Carney revising downward his expectations for economic growth for the early part of this year.

At a news conference Monday, Finance Minister Jim Flaherty also expressed concern about the deteriorating situation.

The good news, he said, was that like in 2008 at the start of what was to become the worst global recession since the Great Depression, Canada has a relatively small national debt and shrinking deficit.

If it needs to act to stimulate the economy, it is in better position than many other countries who have spent most of their ammunition to combat the previous downturn.

“Our situation is imperfect but it’s better,” he told reporters. “We are in a position to act to protect Canada.”

At about 35 per cent of gross domestic product, Canada’s national debt is the envy of its peers in the Group of Seven big advanced economies.

The Canadian Press