Bank of Canada's Carney reiterates need for eventual rate hike

Mon Feb 25, 2013 3:22pm EST

Related Topics

* Bank of Canada sticks to message rate hike needed in time

* Weak data has pushed back market forecasts for rate hike

* Canadian interest rates are at near-record lows

By Russ Blinch

LONDON, Ontario, Feb 25 (Reuters) - The head of the Bank of Canada reiterated on Monday that the next move in the country's interest rates is likely to be higher, even as he acknowledged growth in the last quarter of 2012 might have been softer than predicted.

Governor Mark Carney noted that the central bank only last month said there's ultimately a need for some withdrawal of monetary policy stimulus, though the prospect was "was less imminent."

"Obviously we stand by that assessment," he told reporters after a speech in London, Ontario.

Some economists last week pushed their forecasts for the timing of the next Canadian rate hike further into the future after data showed the economy registered its lowest inflation in more than three years last month and retail sales sank in December.

Canadian interest rates are at a near-record low 1 percent. The Bank of Canada has said since early last year its next move is likely to be a rate increase, making it the only Group of Seven central bank with a tightening bias.

The weak data prompted some speculation the central bank could drop the tightening bias. But Carney's comments seemed to suggest the bank favors the status quo for now, said Benjamin Reitzes, a senior economist and foreign exchange strategist at Bank of Montreal

"He still said that rates will still eventually have to go higher ... there's no reason to believe they're going to change things materially at this point," said Reitzes.

The bank last month slashed its fourth-quarter annualized growth forecast to 1.0 percent from 2.5 percent. But Carney said on Monday this might now also be too optimistic, citing the emergence of downside risks the bank had identified.

"I don't want to overemphasize shorter-term data, but there is a bit of that bias and I would say that, particularly around the fourth quarter of 2012, we'll find out shortly, but it might be slightly softer than we had forecast," he said.

Statistics Canada will release figures for fourth quarter growth this Friday.

Carney said one reason for the likely lower growth was an unexpectedly weak export sector, which is suffering from what he called a "competitiveness element."

Exporters are struggling to cope with a strong Canadian dollar and soft demand, particularly from the United States.

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