UPDATE 4-Bank of Canada pushes rate hikes off, cites weak Q3

Wed Oct 24, 2012 2:49pm EDT

Related Topics

* Carney says new language means rate hike less imminent

* Third-quarter growth forecast cut to 1.0 percent from 2.0

* BoC sees more slack in economy than previously thought

* Data revisions imply household sector more vulnerable

By Louise Egan and Randall Palmer

OTTAWA, Oct 24 (Reuters) - Canadian interest rate hikes have become "less imminent" as the economy slows, Bank of Canada Governor Mark Carney said on Wednesday in unusually explicit comments likely aimed at clearing up confusion over the central bank's recent statements.

The bank has been signaling since April that it will eventually raise its overnight rate from the current 1.0 percent, making it the only central bank among major industrialized economies to lean toward a rate hike.

But a speech by Carney last week, ironically about greater monetary policy transparency, was widely seen as less hawkish than before, and a majority of analysts in a Reuters poll had predicted the bank would soften its language on rates.

The bank did soften its tone on Tuesday, but not by as much as the market had expected, and some concluded that it was perhaps even more hawkish than before.

Carney set things straight in a news conference on Wednesday.

"The case for adjustment of interest rates has become less imminent," he said bluntly.

"But it is important to recognize ... that over time rates are more likely to go up than not," he added.

The Canadian dollar weakened and bond yields eased.

"This is by far the clearest communication we've had from the BoC over the last tumultuous nine days," said economist Derek Holt of Scotia Capital. "That's as clear a signal as any that the BoC is more dovish with its latest statement and (Monetary Policy Report)."

Canada recovered more quickly from the global financial crisis than other major economies and interest rates are expected to rise well before they do in the United States and other countries as its economy continues to absorb excess slack.

Carney said exports will recover gradually as U.S. demand recovers. He admitted concerns about household debt, which has soared to record highs helped by ultra-low borrowing costs.

WORRIED ABOUT DEBT

The confusion reflected a perception of mixed messages in the central bank's interest rate announcement on Tuesday, when the bank altered previous language to say a withdrawal of monetary policy stimulus was only likely "over time."

It had previously said it would withdraw stimulus to the extent the economy continued to expand and absorb excess slack, making it easier to predict when that might happen.

But the bank also highlighted the possibility of using monetary policy to rein in that rising personal debt. That hinted at a rate hike aiming at financial stability, something done only in extreme circumstances by a bank whose mandate normally targets 2 percent inflation.

Carney said the central bank would be up-front about its intentions and that it has no plans to use debt levels as a reason to act for now as it assessed the impact of tighter mortgage rules and other regulatory measures.

"The cumulative effect of those measures has not been fully been felt. So we with others are monitoring the impact of those steps," he said. "Monetary policy can play a complementary role, it's not the first mover in any of this."

Mark Chandler, a strategist at the Royal Bank of Canada, said the overall message was that the market should not price rate cuts into their forecasts, as was the case until this week.

"They've been surprisingly obstinate in their commitment to eventually raise rates, they're not pulling back from that," he said.

WEAK THIRD QUARTER

The bank on Wednesday halved its forecast for third-quarter growth to an annualized 1.0 percent and said the degree of slack in the economy had widened to two-thirds of a percent from about half a percent in the second quarter.

But the lower third-quarter growth estimate partly reflected temporary disruptions in the oil sector, and the bank painted a brighter picture of the following two quarters.

It forecast average growth of more than 2 percent through 2014 as foreign demand for Canadian exports recovers.

The bank also said recent revisions to the household debt-to-income ratio, which has approached levels seen in the United States before the housing crash, implied "a more vulnerable household sector than previously thought".

It saw signs of overbuilding in the housing sector despite a decline in housing investment in the second and third quarters.

But the bank also said heavy debt loads might be making consumers more cautious, and tighter mortgage rules were expected to contribute to a more sustainable housing market.

Canada's housing market dipped during the recession, but quickly bounced back, with rising prices and bidding wars in key urban markets.

But house prices dipped 0.4 percent in September from August, the Teranet-National Bank Composite House Price Index showed. The year-on-year rise in prices slowed for the 10th straight month.

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