By Nirmala Menon
OTTAWA--Canada's central bank "may" hike interest rates if output
continues to grow above trend in a nation where the financial system
is "firing on all cylinders," Governor Mark Carney said in an
interview broadcast late Wednesday.
However, he acknowledged the world is in a "very dangerous place" and
slowing global growth is having a knock-on effect on the country,
according to a transcript of the interview.
Mr. Carney's use of the term "above trend" is more specific than the
phrase in the central bank's last two policy decisions. The June and
July rate statements said that "to the extent that the economic
expansion continues and the current excess supply in the economy is
gradually absorbed, some modest withdrawal of the present considerable
monetary policy stimulus may become appropriate."
The Bank of Canada is the only major central bank contemplating rate
hikes while global peers slash rates or undertake other forms of
monetary easing to stimulate their economies. In the interview with
BBC's HARDtalk, Mr. Carney, who is also chairman of the Basel-based
Financial Stability Board, the global body driving financial
regulatory reform, said Canada is in a "very different place" compared
with the U.K. and other major economies.
"Our economy's almost back at full capacity, the labor market's been
growing," he said. "We had been growing above trend, and the extent to
which we continue to grow above trend, we may withdraw some of that
monetary policy stimulus."
Mr. Carney said the overnight rate, which has stood at 1% since
September 2010, is "very low."
"We have a financial system that's firing on all cylinders and so we
will have to adjust--we will adjust if it's appropriate. That said,
the world's a very dangerous place at the moment," he said.
The economy's trend rate of growth is around 2%. Gross domestic
product grew an annualized 1.9% in the first quarter, below the 2.5%
predicted by the Bank. Last month, the central bank cut projections
for the second quarter through the first three months of next year. It
slashed the forecast for the quarter ended June to 1.8% from 2.5%.
Statistics Canada will release the figures at the end of August.
Mr. Carney said slowing growth in China and other major emerging
markets has had a "knock-on effect" on Canada, with commodity prices
down a sharp 15% over recent months. He said Canada remains a net
beneficiary because commodity prices are still about 20% higher than
the historic average. "But there is an adjustment and a fairly
synchronized deceleration of the global economy at the moment," Mr.
Carney said.
He said there is no banking crisis brewing in Canada, noting that
unlike other countries, risky lending to the property market is backed
by government insurance, and that the Canadian government has the
strongest balance sheet in the G-7.
Mr. Carney denied a suggestion that Mario Draghi, President of the
European Central Bank, created a false impression with his July 26
remarks that the ECB will take any measures within its mandate to
preserve the euro. He said the market misread what Mr. Draghi
announced a week later, and a re-evaluation is underway. He said the
ECB has made a "big" shift in the way it's addressing the crisis.
"They're going directly to their responsibilities, which is to get rid
of, in their terms, convertibility risk. The idea the countries would
pay more for their debts because of the possibility that the euro will
not exist, the ECB is standing in there and saying, no, we're going to
stand against that and we're going to use all their fire power for it,
and that is a major shift," he said. "So Mario Draghi delivered
absolutely on what he alluded to in London."
Mr. Carney said the FSB is auditing the European Union, the U.S. and
Japan to ensure compliance with new bank capital rules and the results
will be reported to G-20 leaders in November. Canadian banks will
comply with the rules by next January, he said.
Mr. Carney said the FSB is "unquestionably" moving in the right
direction to end the phenomenon of "too-big-to fail" banks "and the
key is by the end of this year, that it's absolutely clear to you, to
the institutions and to G-20 leaders what's left to be done and that
everyone is held to account on that." He said transparency has
improved "but it can get a lot better."
He said London's reputation as a global financial center has "taken
some hits, without question" because of recent scandals, including the
rigging of the London interbank offered rate.
Mr. Carney also said he is "very focused" on his jobs as the head of
the Canadian central bank and FSB, and isn't considering the position
of Bank of England Governor. The Financial Times reported in April
that Mr. Carney was approached as a possible candidate to head the
Bank of England.
Write to Nirmala Menon at nirmala.menon@dowjones.com
(END) Dow Jones Newswires
August 08, 2012 23:30 ET (03:30 GMT)
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