Bank of Canada's Carney defends maverick rate-hike view

Wed Jul 18, 2012 1:59pm EDT
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By Louise Egan and Randall Palmer

OTTAWA (Reuters) - Canada cannot "cut and paste" monetary policy from elsewhere and, unlike its struggling peers, will need higher interest rates as the economy inches closer to its speed limit, Bank of Canada Governor Mark Carney said on Wednesday.

Carney is in a lonely position as the only central bank chief in the major advanced economies who is talking of raising rates while everyone else is moving in the opposite direction.

But he was quick to defend that stance in a news conference even though the quarterly report he was releasing downgraded growth forecasts for Canada, the United States and the global economy.

"We make monetary policy for conditions in Canada. Monetary policy is extremely accommodative, financial conditions are extremely accommodative," Carney told reporters.

"We're in a situation where there's a very small amount of excess capacity in this economy. Rates are at 1 percent. They're very low ... Global monetary policy is not a cut and paste."

Carney was the first in the Group of Seven industrialized nations to hike rates after the global financial crisis but has kept the bank's benchmark rate frozen at 1.0 percent since September 2010.

Now, with the economy running at just half a percent below its production capacity - the speed at which it can grow without fueling inflation - he is preparing to tighten the screws again.

"This projection includes a gradual reduction in monetary stimulus over the projection horizon, consistent with achieving the inflation target," the bank said in its Monetary Policy Report.   Continued...