Bank of Canada still signals higher rates possible

Thu Jun 21, 2012 3:37pm EDT
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By Richard Woodbury

HALIFAX, Nova Scotia (Reuters) - The Bank of Canada is still considering interest rate hikes, it signaled on Thursday, while cautioning it was keeping a close eye on Europe and saw less risk from a heated domestic housing market after the government tightened mortgage rules.

The central bank's hawkish stance contrasts with most of its Western peers, including the U.S. Federal Reserve, which delivered another round of stimulus to the struggling economy there on Wednesday.

Governor Mark Carney said that despite the debt crisis in Europe, Canada's economy continues to grow and absorb slack, with resilient household spending supported by very low interest rates.

And while he said in a speech that the country's relatively good performance by global standards was largely due to unsustainable debt-fueled consumer spending, he later applauded the government's move on Thursday to tighten access to government-insured mortgages.

"These measures reduce the number one risk, domestic risk to the Canadian economy," he told reporters in Halifax, Nova Scotia after giving a speech.

Several analysts said Ottawa's measures aimed at cooling the heated housing market and making it harder for Canadians to borrow too much at today's extremely low rates meant the central bank had more room to keep rates low for longer.

"The tightening of the mortgage rules will reduce the pressure on the Bank of Canada to hike rates," said Charles St-Arnaud of Nomura Global Economics.

But Carney played down the correlation. "No, is the short answer," he said when asked if the mortgage changes were equivalent to several quarter-point interest rate hikes.   Continued...

A pedestrian holding an umbrella walks past the Bank of Canada building during a snow fall in Ottawa January 17, 2012. REUTERS/Chris Wattie