MONTREAL (Reuters) - Recent weak economic data in Canada was expected and does not necessarily mean the central bank will change its view that eventual interest rate hikes are needed, Bank of Canada Governor Mark Carney said on Thursday.
Canada recovered more quickly from the global recession than the United States or Europe, prompting the central bank to hint that it may have to raise interest rates.
But the expansion appears to be slowing. The economy shrank in August for the first time in six months, housing starts slowed in September, the job market stalled in October and exports remain sluggish.
“We have a relatively weak forecast for the third quarter - 1 percent - and data is broadly in line with that,” Carney told reporters in Montreal after giving a speech there.
“There are some timing issues that drive some of the output in the energy sector, which will shift some growth between the third and the fourth quarter ... But I wouldn’t over-interpret recent data and I certainly wouldn’t draw any connection to our monetary stance,” he said.
The central bank has held its key interest rate at 1.0 percent for over two years. In April it defied the global trend and began signaling its next move would be a rate hike rather than a cut. Last month Carney upheld the rate-hike talk but said such a move was ”less imminent.
In October the bank cut its forecast for third-quarter growth to 1 percent from 2 percent annualized, citing temporary shutdowns in the oil sector. But it predicted growth would speed up to at least 2.5 percent in every other quarter through the end of next year.
Carney remained cautious in his outlook for the once-booming housing market despite a report on Thursday showing housing starts fell more sharply than expected in October.
“We still see, as we highlighted in the MPR (Monetary Policy Report), that housing starts, particularly multiples, condos, are well above historic averages, even adjusting for population,” he said.
The MPR also predicted housing would start to exert a drag on economic growth as of now. “We’re starting to see some things that are consistent with that, so it’s entirely consistent with expectations,” Carney said.
He repeated warnings made on Wednesday about a possible recession in Canada if Washington does not avoid the “fiscal cliff” - tax increases and spending cuts worth $600 billion that are set to kick in early in the new year that could hurt growth.
Policy makers have “flexibility” to deal with that if it happens, he said.
“TOO BIG TO FAIL” NOT OVER YET
In his speech, Carney outlined his reform agenda as chair of the Financial Stability Board, the G20’s regulatory task force.
He said some investors still seem to think governments will rescue failing large banks despite new rules designed to allow troubled institutions to collapse without taxpayer bailouts.
The FSB has made progress in implementing reforms to ensure no bank is considered “too big to fail,” but more work may need to be done, he said.
“It is not clear yet that too-big-to-fail has been ended. For example, credit rating agencies continue to boost their ratings of major banks by a factor that recognizes implied government support.”
“Despite the proclamations of G20 leaders, investors seem to think governments will once again blink when faced with a failing large bank,” he said, adding this might “underscore the need for further measures.”
The FSB has identified 28 global banks that will be subject to special rules because they are so big and complex that they could drag down the entire financial system if they failed.
The rules are part of a series of reforms that form the world’s response to the global financial crisis. They range from bolstering bank capital to regulating the so-called shadow banking sector, a parallel credit system covering money market funds, special investment vehicles, hedge funds and repurchase agreements.
Because of the changes, the world’s banks are now safer than they were on the eve of the crisis, Carney said.
“While much has been accomplished, much more needs to be done,” he added.
Reporting by Louise Egan and David Ljunggren in Ottawa; Editing by James Dalgleish