Bank of Canada sees low rates, but not copying Fed

Mar 11, 2010, Bank of Canada sees low rates, but not copying Fed

By Louise Egan

OTTAWA (Reuters) – The Bank of Canada believes interest rates should stay at near-zero levels for another few months even though the economy is showing signs of quicker than expected recovery, the central bank chief said on Thursday.

At the same time, Bank of Canada Governor Mark Carney said there was no need for Canada to align its interest rate moves with those of the United States, as speculation grows that Ottawa could start removing emergency stimulus measures before Washington does.

“It’s our policy right now that the appropriate path of monetary policy through the end of June this year is to keep our target rate at one quarter of 1 percent,” Carney told university students following a speech.

“But we will adjust that as appropriate over time in order to achieve our inflation target,” he said.

The U.S. Federal Reserve has committed itself to keep borrowing costs low for an “extended period” and most primary dealers do not expect any change in that language after a Fed monetary policy meeting next week.

Canada’s economic and financial linkages with the United States are so strong that most economists expect some degree of monetary policy coordination. Carney tried to downplay those expectations.

“It is absolutely not necessary to have the same monetary policy at the same time in the two countries,” he said.

The bank slashed rates to 0.25 percent in April 2009 and took the unconventional step of committing itself to holding the rate at that level until the end of June this year, conditional on inflation staying on a desired trajectory.

In its rate statement earlier this month, following a surprisingly strong fourth-quarter year-on-year growth of 5 percent, the bank sounded slightly more hawkish on eventual rate hikes.

Carney said the bank would take action if it appeared poised to miss its 2 percent inflation target. “With a flexible exchange rate we’re on the hook for achieving the inflation target. We don’t have an out.”

HAVE CAKE, EAT IT TOO

Carney also weighed in on a debate about whether central banks should take asset prices into account when setting monetary policy, and he suggested that this is not necessary if countries have solid financial regulations.

“There is some discussion in a range of settings — academic and central bank — about this relationship between price and financial stability, and the role of monetary policy in either fomenting sharp asset price movements or leaning against them,” he said.

“Our view is that the first line of defense of financial stability is regulation … the experience with Canada, Australia, other major inflation targeters has been that you can have your cake and eat it too — you can have price stability, you can have financial stability if you get the regulatory side right.”

This year will be crucial for G20 leaders to agree on a set of reforms to the financial system, he said, expressing confidence that they would succeed.

In his speech, Carney said the Bank of Canada was determined not to repeat the mistake of the 1970s when it overestimated the rate of potential growth in the economy following a major crisis.

In the bank’s most recent forecasts, it said potential growth, or the speed at which the economy can grow without inflationary pressures, is about 1.5 percent in 2010 and 1.9 percent in 2011. Carney said the Canadian economy is unlikely to be able to grow by more than 2 percent in the longer term, lower than the historical norm, due to restructuring in the economy.