* Carney repeats that rate hikes likely needed
* Sees softness in economy; positive signs in housing, debt
* Says policy guidance is never a promise
By Solarina Ho and John Tilak
TORONTO, Dec 11 Bank of Canada Governor Mark
Carney, who has signaled for months that the central bank's next
interest rate move will be an increase, said on Tuesday he won't
rush through any policy decisions before he leaves in June to
head the Bank of England.
After his first speech since his surprise appointment as BoE
governor, Carney was asked if he would leave the nagging problem
of soaring household debt for his successor to deal with.
"What would be entirely wrong is to manage policy to my
horizons as opposed to the right horizons to have, the optimal
policy horizons. We're not going to try to cram a bunch of
decisions into the next six months," he said.
Carney repeated the bank's hawkish line that it will likely
need to raise rates, making it an outlier among developed
countries' central banks, which are more concerned about
Markets don't expect a rate move before late 2013.
But Carney has also hinted at a less conventional use of
monetary policy that could alter that timetable: hiking rates to
specifically target excess household debt and the heated housing
He has promised to be transparent about the bank's goals if
it were ever to resort to such a move.
Targeting rates for that kind of use would be unusual for
the inflation-targeting central bank but it fits within its
mandate, which allows monetary policy to be used for financial
stability purposes in some circumstances.
High household debt and a heated housing market remain the
biggest domestic threats to Canada's financial system, the bank
said last week.
"In current circumstances, the bank may want to set interest
rates higher than would otherwise be warranted to bring
inflation back to target within the typical six- to
eight-quarter time frame," Carney said in the prepared text of a
speech he was giving in Toronto.
Carney said he was cautiously encouraged by some cooling in
the housing market and said households had become more prudent
in their borrowing, in part because of the bank's "tightening
bias". The share of new fixed-rate mortgages in Canada has
almost doubled this year to 90 percent.
He also acknowledged some unanticipated softness in the
economy, although he gave no indication that it would skew the
bank's outlook substantially.
"Just the simple math of it is that the third quarter was
slightly slower (than forecast)... (The output gap) would be
slightly larger, but this on margin," he said.
"That said, the momentum is somewhat softer as we signaled
in our December rate decision, and recent data is consistent
with a bit more softness that is there."
Some temporary factors such as oil production disruptions
will pass through by the fourth quarter and first quarter of
next year, he said.
GUIDANCE NEVER A PROMISE
Carney's speech centered on the usefulness of policy
guidance from the central bank. The bank would give markets an
explicit heads-up if it were ever to use monetary policy to lean
against the heated real estate market, he said.
Carney is generally opposed to spoon-feeding market players
with clues on interest rate intentions except in extraordinary
His guidance analysis came after he confused markets in
October with less-than-clear statements, leading some to believe
the bank had hardened its rate-hike view when, in fact, it was
trying to say that rate increases were "less imminent."
A better approach is to be transparent in what economic
factors the bank takes into account when setting rates, rather
than using stock phrases or code words that markets come to rely
on for guidance, he said.
"This guidance is never a promise, however. Actual policy
will always respond to the economic and financial outlook as it
evolves. Market expectations should do the same, reflecting
differences in perspectives amid a common understanding our
objective," he said.