February 18, 2008 / 9:32 PM / in 10 years

Bank of Canada's Carney confirms rate cuts to come

OTTAWA (Reuters) - The Bank of Canada will consider strong domestic demand, the impact on prices of the strong currency and the possibility of a more protracted U.S. slowdown and tighter credit conditions when setting interest rates in March, Governor Mark Carney said on Monday.

In the prepared text of his first speech since becoming Bank of Canada Governor on February 1, Carney dampened any market speculation of an unexpected rate cut prior to the bank’s next scheduled meeting on March 4.

But he left the door open to a rate reduction that might be more aggressive than the quarter-point cuts the bank made to its overnight rate in December and January.

In January, after leaving rates at 4 percent, the bank said more monetary stimulus would likely be required in the near term.

“The timing and degree of that stimulus will be determined at future fixed announcement dates, after we have conducted a thorough analysis of, and applied our judgment to, all information available to us at that time,” Carney said in his speech, echoing statements made earlier this month in Tokyo.

Strong domestic demand in Canada has so far prevented the Bank of Canada from cutting rates as sharply as the U.S. Federal Reserve even though Canadian exports are weakening due to the U.S. slowdown.

Much of the boost to domestic spending comes from the most recent wave of globalization, Carney said, meaning that the prices for Canada’s top exports have risen while import prices have dropped.

“The impact from our terms of trade is one factor that could lead to stronger domestic demand growth than we had assumed. This is something that we at the Bank will continue to watch closely,” he said.

In addition, the strong Canadian dollar has pressured some retail prices lower but there is a risk that the downward pressure on inflation could be greater and more prolonged than the bank had assumed, he said.

On the downside, Carney cited the tightening of credit conditions and the U.S. slowdown as two threats to the economy that could turn out to be more significant than the bank had projected.

Canada’s economy has adjusted well to sharp movements in its terms of trade, Carney said, citing increased business investment, wage growth and strong job growth.

But he said the bank must be careful how it assesses Canada’s inflationary path because of the uneven impact on prices of globalization -- it pushes up prices for commodities, especially energy, but leads to lower prices for manufactured goods.

“The bank will also continue to look at a range of measures to assess the underlying trend of inflation. Considerable judgment must always be applied, and no one measure should be relied on exclusively,” Carney said.

Reporting by Louise Egan; Editing by David Ljunggren and Marguerita Choy

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