Bank expected to keep interest rates low

Bank of Canada governor Mark Carney often talks about the danger of too much household debt — but he's unlikely to do anything about it when he has a chance this week. THE CANADIAN PRESS/Sean Kilpatrick

OTTAWA - Bank of Canada governor Mark Carney often talks about the danger of too much household debt — but he's unlikely to do anything about it when he has a chance this week.

Economists are unanimous that Carney will hold back from raising borrowing costs on Tuesday when he and his policy council announce the new target interest rate.

It's been at one per cent since September 2010, and had been even lower since the recession — leading to some of the lowest borrowing costs in Canadian history.

With the U.S. rate likely on hold until 2014, economists say it may be many more months before the Bank of Canada moves off one per cent, fearing that further widening the gap in the cost of money between the two countries will send the loonie into the stratosphere.

Last week, all 12 members of the C.D. Howe Institute monetary policy panel, comprising private sector economists and those in academia, were in agreement there should be no change to interest rates.

"They (central bank) are very concerned about the household debt situation and the strength of the housing market, and the overall stability of domestic spending, and it just isn't consistent with an overnight rate below inflation," said Douglas Porter of BMO Capital Markets, a member of the C.D. Howe panel.

"But unfortunately they face this eternal tension of a healthy domestic economy and a shaky external environment."

As long as the U.S. continues to struggle, despite the occasional encouraging signal, and the European debt problems remain unresolved, the Bank of Canada will be loathe to add negative drag to the domestic economy by tightening lending conditions, he explained.

Where Carney may make news this week is an upgrade to economic growth expectation for this year.

In a recent interview, the governor talked about "firmer" conditions and better than expected momentum in the U.S. recovery. Since, Statistics Canada reported employment grew by a massive 82,000 jobs in March.

In the last monetary policy review in January, the central bank estimated the economy would expand by a modest 2.0 per cent this year and 2.8 per cent next.

Analysts expect the bank to raise 2012 growth a notch to the consensus economic forecast of 2.1 per cent this year, or perhaps slightly higher.

Just how much higher may influence when Carney feels comfortable about doing what he appears anxious to do, and that is bring interest rates back to normalized levels.

Although still a minority view, three of the 12 members of the C.D. Howe panel think the governor should nudge the policy rate up to 1.25 per cent as early as June 5, and five believe it should come in October.

"Some members urging a higher overnight rate over the coming year took a more optimistic view of global prospects," the think-tank said.

"For the most part, however, the tendency toward a higher rate target stemmed from concern that Canada's growth is too tilted toward housing and fuelled by rising household indebtedness."

At 151 per cent of disposable annual income, Carney said recently Canadians have never been so indebted.

The chief concern, he said, was a shock to house prices or higher rates that would reduce household assets and increase financing charges, leaving little in consumers' pockets for purchases that stimulate the economy.

While he said he was prepared to intervene in an emergency, Carney noted more direct policy actions, such as a further tightening of mortgage rules, would be preferable and effective.