Canada Raises Policy Rate, First in G-7 After Global Recession

Canada Raises Policy Rate, First in G-7 After Global Recession

By Greg Quinn

June 1 (Bloomberg) -- The Bank of Canada raised its key interest rate from a record low today, the first Group of Seven country to do so since last year’s global recession, and said further moves will be “weighed carefully” against future growth in Canada and elsewhere.

The target rate on overnight loans between commercial banks rose to 0.5 percent from 0.25 percent, as predicted by 25 of 27 economists surveyed by Bloomberg News. It was Mark Carney’s first increase as governor and the bank’s first since July 2007.

“Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments,” the Ottawa-based central bank said in a statement today. The next decision is July 20.

The bank said Canada’s recent growth and inflation have been “largely as expected” while the global recovery is “increasingly uneven.” Canada’s output grew at a 6.1 percent annualized pace, twice that of the U.S. in the first quarter, while the central bank predicts inflation will exceed its 2 percent target over the next year. The domestic economy is strong enough to outweigh concerns that Europe’s debt crisis will trigger a global slowdown, said Meny Grauman, a senior economist at Canadian Imperial Bank of Commerce in Toronto.

“The recession in Canada wasn’t as deep as in other places, especially the U.S., and we are seeing healthy sustainable growth,” Grauman said. “The decision is to raise rates above an emergency setting, it’s not about tightening to any significant extent.”

Europe Concerns

The Bank of Canada said today that domestic growth was “robust” in the first quarter, while Europe and the debt crisis were mentioned four times in the policy makers’ statement.

“The global economic recovery is proceeding but is increasingly uneven across countries, with strong momentum in emerging market economies, some consolidation of the recovery in the United States, Japan and other industrialized economies, and the possibility of renewed weakness in Europe,” the statement said.

Brazil, Malaysia and Peru have already raised rates this year. Earlier today, Australia’s central bank left its benchmark interest rate unchanged at 4.5 percent after six previous increases since October, and signaled it may keep borrowing costs steady in coming months as it assesses the impact of the most aggressive rate increases in the Group of 20. India’s central bank boosted its reverse repurchase rate for the second time in five weeks on April 20.

The Federal Reserve may not raise its key lending rate until the fourth quarter, and the European Central Bank may wait until the first quarter of next year, according to separate Bloomberg surveys.

‘Considerable’ Stimulus

“This decision still leaves considerable monetary stimulus in place, consistent with achieving the 2 percent inflation target in light of the significant excess supply in Canada, the strength of domestic spending, and the uneven global recovery,” the bank said today.

Canada has benefited from rising demand for copper, gold, wheat and oil from emerging economies such as India and China. The country is the world’s second-biggest exporter of natural gas, and sits on the largest pool of oil reserves outside the Middle East.

Private companies led a 108,700 gain in jobs last month, the largest in records dating from 1976, and the unemployment rate fell to 8.1 percent from 8.2 percent. Job growth is supporting retail sales, which set a record high in March according to Statistics Canada.

‘Without Delay’

Canada should raise rates “without delay,” the Organization for Economic Cooperation and Development said May 26, as it predicted the country’s growth will lead the G-7 this year at 3.6 percent.

The Bank of Canada said in April that inflation will be “slightly higher” than its 2 percent target in the next year. Inflation accelerated to 1.8 percent in April from 1.4 percent in March.

The central bank also said today it will reduce the excess C$3 billion ($2.86 billion) in the system that settles overnight commercial bank payments back to the usual C$25 million in settlement balances by June 16. The bank had used extra cash in the system to help keep the benchmark rate close to 0.25 percent. As well, the bank said today it would make purchase and resale transactions with major bond dealers a permanent feature of its monetary policy framework.

‘Rich Resources’

“Canada has a better position than many other countries in terms of those really rich resources we have in Canada, and how that needs to fuel an upcoming recovery,” Siemens Canada Ltd. Chief Executive Officer Roland Aurich said in a May 26 interview in Ottawa. Siemens may soon open a new factory in Ontario to produce wind turbine blades to take advantage of local demand, he said.

Aurich also said that Canada needs more export growth and a smooth end to government stimulus for a true recovery. Finance Minister Jim Flaherty said May 3 that that while the country’s recession is “technically” over, he was still “cautious” about the recovery.

Canada’s dollar, identified as a risk to future growth by the bank in April, has weakened against the U.S. dollar since April 20. A stronger currency makes the country’s exports less competitive. The bank in April increased its assumption for the Canadian dollar to 99 U.S. cents, after saying in its January report the currency would average 96 U.S. cents.

The bank should avoid boosting the country’s dollar too much with rate increases, said Brad Miller, Chief Executive Officer of IMW Industries Ltd. in Chilliwack, British Columbia.

The high currency “is the flip side of our success,” said Miller, whose company makes natural gas machinery. “When you look at manufacturing it makes us less competitive.”

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net.

Last Updated: June 1, 2010 09:00 EDT