Carney’s Controversial Move

18 July 2012 10:00 - Phoebe Robinson

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Carney’s Controversial Move

Mark Carney the governor of the Bank of Canada is due to explain his decision as to why he is talking about rate increases even as he reduces Canada’s growth forecast and investors bet on a cut. Carney has now pointed towards tighter policy three times. He is keeping his key lending rate at 1% and palmed down his forecasts for Canadian growth in the coming two years.

The idea of rate increases set Canada apart from the central banks who are easing monetary policy, for example the US federal reserve, the European Central Bank and the People’s Bank of China. Despite was the governor of the Bank of Canada is saying investors have said there is still a 25% chance that he will cut rates by the end of the year as the Canadian economy is weighed down by the Eurozone fiscal crisis and a slow US recovery, according to trading in overnight index swamps.

Thanos Bardas who is the managing director in Chicago at Neuberger Berman LLC said, “This is the story of the Bank of Canada over the last few years. Every time they would like to raise rates because they think the economy is nearing full potential there are external events that get in the way.”

The central bank has cut back its economic growth forecasts to 2.1% this year from 2.4%. It also said that the US economy is recovering slowly the European economy is likely to contract again.

It does not look like Carney will abandon his plans until he sees further weakness from Europe or Canada before he would consider abandoning the plan to raise rates. Another trigger would be a large shift in Canada’s inflation outlook. The central bank has a stable forecast for core inflation which is what is used as a guide for future forecasts and trends.

The majority of investors asked have said they are doubtful that Carney will go ahead with higher rates this year. With the European economy in tatters and the Chairman of the US Federal Reserve saying that reducing US unemployment is going to be a very slow process, points towards there being only a very slim chance that the Bank of Canada will increase by the end of the year. However it has been emphasised by economists in Canada that no matter how Carney’s statements are interpreted by investors, Canadian central bank’s hands are not tied.

 

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Related Links:
• Bank of Canada
Official site
• US Federal Reserve
Official site

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