The Bank of Canada may keep its benchmark lending rate at a record low today and renew a vow to freeze borrowing costs until mid-2010 as a surging Canadian dollar hurts exporters and threatens to prolong the first recession in 18 years.
The target rate for overnight loans between commercial banks will remain at 0.25 percent in a decision due at 9 a.m. New York time, according to all 22 economists surveyed by Bloomberg News. Today’s meeting is the first opportunity for the bank to update its April plan to consider so-called quantitative easing, and a commitment to keep the benchmark rate unchanged through June 2010.
The central bank probably won’t alter either policy, leading investors to focus on new currency comments, said Doug Porter, deputy chief economist with BMO Capital Markets in Toronto. “The events since the last meeting have been about a wash,” Porter said.
“I would be surprised if they didn’t at least make a reference to the currency, suggesting that will be a restraint to some of the other positive news.” The recession is probably easing after output dropped at a 5.4 percent pace in the first quarter, which was less than the 7.3 percent drop central bankers had predicted. The return to growth is now being hobbled by the Canadian dollar, which posted its biggest monthly gain in more than 50 years in May, hurting the country’s already frail exports of goods such as cars and lumber to the U.S.
‘Still Not Good’ A failure to comment on the Canadian dollar’s gains could encourage traders to push it even higher as they bet Carney won’t try to stop it, Porter and Meny Grauman, a senior economist at Canadian Imperial Bank of Commerce in Toronto, said.
“The bank at least will take a crack at trying to counter some of that,” Porter said. Finance Minister Jim Flaherty said May 29 he’s “concerned” by the stronger dollar. “I know that the governor of the Bank of Canada is monitoring that,” he said.
The central bank’s mandate is setting interest rates to keep inflation at 2 percent. It has said the consumer price index will fall by 0.8 percent in the third quarter of this year, and not return to target before the second half of 2011.
Moves Are Working Governor Mark Carney, 44, has cut the benchmark rate as far as it can go and acted to restore normal trading in credit markets, to deal with the recession and the biggest global financial crisis since the Great Depression. Those moves are working, said Patrick Daniel, chief executive officer of Enbridge Inc., the biggest transporter of oil to the U.S. from Canada’s oil sands.
“The spreads are still quite wide on bonds, corporate bonds, but they are narrowing in and getting better every day,” he said in an interview. “There is still a lot of pain and agony as a result of the recession, and the GDP growth rate is almost non-existent, so we still have a long way to go.”
Exports fell an annualized 30 percent in the first quarter, led by the automotive industry, Statistics Canada said June 1. Canada is among the most export-dependent countries in the Group of Seven, generating 30 percent of its output from shipments of goods and services abroad.
Canada and Ontario are investing $9.5 billion in General Motors Corp. to keep production of the bankrupt company in Canada. Those governments have also pledged $2.42 billion for Chrysler LLC’s local operations, joining with the U.S. to try to rescue the auto firms.
‘Just Hanging On’ The economy will shrink by 3 percent this year, the central bank predicts. That would be the biggest drop since 1933, according to Statistics Canada. The unemployment rate has also been at a seven-year high of 8 percent the last two months, and Statistics Canada’s index of leading indicators has dropped for eight months in a row.
“Traffic is down significantly, we are just hanging on,” said Ron Lennox, vice president of the Canadian Trucking Alliance in Ottawa, which represents 4,500 companies. “Keep interest rates low to help us in this economy, don’t pull them up too fast.”
Mike Winger says his future is still at risk. The maintenance worker at an AbitibiBowater Inc. mill in Thorold, Ontario, was one of hundreds of forestry workers who protested outside Prime Minister Stephen Harper’s office two days ago, saying the industry needs the same help as automakers and banks.
AbitibiBowater, North America’s biggest newsprint maker, filed for bankruptcy in April. “It’s getting worse from what I’m seeing,” Winger, 40, said as he had a cigarette outside the building that houses the prime minister’s office. “Who knows what’s going to happen now?”