June 16, 2010 / 4:04 PM / in 7 years

Carney: don't take rate hike for granted

CHARLOTTETOWN, Prince Edward Island (Reuters) - Bank of Canada Governor Mark Carney cautioned investors on Wednesday not to take another interest rate hike for granted, saying volatile global conditions mean no particular path for monetary policy is preordained.

<p>Bank of Canada Governor Mark Carney speaks at the International Organization of Securities Commissions (IOSCO) conference in Montreal, Quebec, June 10, 2010. REUTERS/Christinne Muschi</p>

The central bank raised its key rate by a quarter point on June 1 to 0.5 percent, becoming the first in the Group of Seven wealthy countries to do so. Markets are pricing in a second hike when the bank makes its next rate announcement on July 20.

“The bank must balance the competing influences on Canadian activity and inflation of momentum in domestic demand and the increasingly uneven global recovery,” Carney said in a speech in the East Coast city of Charlottetown.

“In light of the scale and volatility of these conflicting forces, it should be evident that no particular path for monetary policy is preordained.”

Carney said the bank will need to be agile and take a subtle approach to monetary policy.

Yields on near-term overnight index swaps, which trade based on expectations for the Bank of Canada’s key policy rate, showed markets see an 82.28 percent chance the bank will tighten rates again in July. This was down from 83.49 percent just before Carney’s speech.

The Canadian dollar firmed to its strongest level since May 14 just after Carney’s speech was released, touching C$1.0224 to the U.S. dollar, or 97.81 U.S. cents. It then pared gains and closed little changed on the day at C$1.0254 to the U.S. dollar, or 97.52 U.S. cents.

“I don’t know if he gave us anything that could cement a view one way or the other,” said Steve Butler, director of foreign exchange trading at Scotia Capital in Toronto. “I do think we will see another rate hike in July.”

Canada’s economy has recovered faster than predicted, fueled largely by consumer spending, and the bank expects it to be the fastest-growing G7 country over the next two years.

A cornerstone of that recovery has been a sturdy residential housing sector, but statistics earlier in the day showed the market was cooling. Sales of existing homes fell 9.5 percent in May from April, data showed.

Carney noted the central bank’s most recent forecast projected housing market activity would slow “markedly” for the balance of the year and that the latest resale numbers are consistent with that.

He also reiterated that growth would be handed off to the private sector as government stimulus winds down.

“Mr. Carney provided no further clarity on the bank’s July 20 policy intentions. They are keeping their options open, and will ”weigh“ the evidence collected up until July 19,” BMO Capital Markets senior economist Michael Gregory, wrote to clients just after the speech.

“We still judge that they will hike rates 25 bps given domestic demand momentum (albeit not as strong in housing as was the case earlier this year).”

Key risks to Canada’s economic outlook are largely external, as the euro zone debt crisis and a still-shaky global recovery could have spillover effects.

“Canada is not an island ... The biggest risks we face are from abroad. Those are the biggest swings,” Carney told reporters following his luncheon speech.

CARNEY TO G20: BE BOLD

To prevent the global recovery from derailing or creating crippling imbalances, Carney urged the G20 group of developing and advanced economies to commit to bold policy changes at their summit in Toronto this month.

“The fiscal challenges that face a number of advanced economies are addressable, but they are addressable with bold action, and that was part of the point of the speech. That is very much part of the point of one of the core objectives for Canada at the G20 summit,” Carney said.

The required changes include more flexible currencies and reforms to boost domestic demand in emerging economies such as China, as well as reducing deficits and enhanced productivity and growth potential in advanced nations.

G20 countries must also follow through with their pledge to reform the financial sector to avoid future meltdowns and to resist trade and financial protectionism, he said.

“These are all big decisions. How quickly and how effectively they are taken will influence activity and inflation in Canada and, therefore, the stance of monetary policy,” he said.

Additional reporting by Louise Egan and David Ljunggren in Ottawa, Jennifer Kwan, Euan Rocha and Jeffrey Hodgson in Toronto; editing by Rob Wilson

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