Carney backs off rate hikes

Interest-rate hikes appear to be on the back burner for the foreseeable future after Bank of Canada governor Mark Carney said Thursday that overstretched households and weak U.S. demand would crimp economic growth in the coming months.

At a speech in Windsor, Ont., Carney said Canadians should brace for months of "modest" economic growth, acknowledging this will be reflected in the bank's revised forecast to be released Oct. 20, in which third-and fourth-quarter estimates would be lowered. Any additional increases to interest rates in this uncertain environment would warrant "caution," he added.

The remarks reinforced a growing belief among Bay Street traders that the odds of another rate hike this year were dwindling to nearly zero. Plus, data released Thursday indicated the economy contracted in July by 0.1 per cent from June levels, the first monthly decline in almost a year.

Economists said Thursday's speech and the GDP report point to a central bank that's done with rate hikes for now.

"Mr. Carney is saying he's willing to keep interest rates low for a while," said Avery Shenfeld, chief economist at CIBC World Markets, adding the central bank is likely to stay on the sidelines until mid-2011.

In remarks to a Windsor business luncheon, Carney painted a portrait of a recovery that has lost momentum, and suggested the slowdown could be attributed to domestic factors -- consumers dragged down by their bloated balance sheets.

"Investment in housing has outstripped their total savings for over nine straight years . . . This cannot continue," Carney said.

The recovery's early spurt, highlighted by annualized quarterly growth in the five-per-cent-plus range, leaned heavily on people capitalizing on low interest rates to buy homes and consumer goods. "The limitations of this reliance are becoming evident," Carney said, warning it appeared "unlikely" private consumption would be bolstered by further gains in housing prices.

Meanwhile, in a related report, Shenfeld said slowing Canadian growth shouldn't derail the federal government from pursuing its deficit-reduction plan.

"It simply makes no sense to be stepping on the monetary policy brake while at the same time extending the time frame for stimulus," he said. "Delay further rate hikes until growth picks up again. But Ottawa should take the first step toward fiscal balance."

The federal government anticipates returning to a balanced budget by mid-decade through restraining program spending growth and higher employment insurance premiums. But on the latter point, Ottawa moved Thursday to restrain future increases in EI premiums for fear of crimping job creation in a slow-growth economic environment.