Carney says may need to keep rates low: report

Fri Jun 24, 2011 11:20am EDT
 
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OTTAWA (Reuters) - Canada's central bank may need to keep interest rates low as the economy faces "substantial headwinds," Bank of Canada Governor Mark Carney said in an interview published on Friday.

"Monetary policy may still need to be stimulative in order to close the output gap and in order to get inflation back to target," Carney is quoted as saying in an interview with the Wall Street Journal.

The bank has kept its key interest rate on hold at 1 percent since last September, after lifting the it from a rock-bottom 0.25 percent. Its next rate decision is July 19.

Most market players surveyed by Reuters on May 31 forecast the bank would resume rate increases in September, but some have since pushed their forecasts even further out.

Carney named the U.S. economic slowdown and the strong Canadian dollar as two major factors that could hinder Canada's economic expansion.

"We see the headwinds both in our export performance and in the inflation data," he said, referring to the currency.

The Canadian dollar is currently trading around C$0.98 to the U.S. dollar, or $1.02.

Carney said the bank may not need to raise rates to a "neutral" level just as the economy reaches its production capacity, and repeated the idea that the neutral rate, which he declined to specify, might be lower than it was before the global financial crisis.

Carney has raised concerns in recent comments about possible overheating in the Canadian housing market, where prices in some cities, such as Vancouver, have skyrocketed.

Higher short-term interest rates could be a tool to curb high housing prices, he said, but he added that regulatory action should be the first option.

(Reporting by Louise Egan; editing by Jeffrey Hodgson and Rob Wilson)

 
<p>Bank of Canada Governor Mark Carney takes part in the unveiling of new $50 and $100 polymer bank notes at the Bank of Canada in Ottawa June 20, 2011. REUTERS/Blair Gable</p>