* Hawkish stance contrasts with U.S. Fed
* Says economy can't depend on debt-fueled spending
* Says new mortgage rules reduce risk to economy
By Richard Woodbury
HALIFAX, Nova Scotia, June 21 The Bank of Canada
is still considering interest rate hikes, it signaled on
Thursday, wh ile cautioning it was keeping a close eye on Europe
and saw less risk from a heated domestic housing market after
the government tightened mortgage rules.
The central bank's hawkish stance contrasts with most of its
Western peers, including t he U.S. Federal Reserve, which
delivered another round of stimulus to the struggling economy
there on Wednesday.
Governor Mark Carney said that despite the debt crisis in
Europe, Canada's economy continues to grow and absorb slack,
with resilient household spending supported by very low interest
And while he said in a speech that the country's relatively
good performance by global standards was largely due to
unsustainable debt-fueled consumer spending, he later applauded
the government's move on Thursday to tighten access to
"These measures reduce the number one risk, domestic risk to
the Canadian economy," he told reporters in Halifax, Nova Scotia
after giving a speech.
Several analysts said Ottawa's measures aimed at cooling the
heated housing market and making it harder for Canadians to
borrow too much at today's extremely low rates meant the central
bank had more room to keep rates low for longer.
"The tightening of the mortgage rules will reduce the
pressure on the Bank of Canada to hike rates," said Charles
St-Arnaud of Nomura Global Economics.
But Carney played down the correlation . "No, is the short
answer," he said when asked if the mortgage changes w ere
equivalent to several quarter-point interest rate hikes.
"These are measures that are very well suited to specific
vulnerabilities, specific risks in the Canadian economy which
relate first and foremost to financial stability. And I'm not
going to be pulled into a monetary policy discussion which is
targeted at price stability," he said.
GROWTH OUTLOOK TWEAKED
The Bank of Canada was the first among the Group of Seven
advanced economies to lift interest rates from a record low 0.25
percent to 1.0 percent in 2010 following the global financial
It has not budged since then, but in April began tentatively
signaling that rate hikes may be approaching as long as the
economy keeps growing an d eating through spare capacity.
Analysts in a Reuters poll released on May 30 forecast the
bank would resume rate hikes in the first quarter of 2013, while
markets, contrarily, are pricing in the chance of a rate cut by
the end of this year.
Carney did acknowledge that the bank would likely revise
down its 2012 economic growth forecast from 2.4 percent, based
on weaker-than-expected first-quarter performance. It will
release its new det ailed pro jections on July 18.
Canada is vulnerable to any worsening of the European debt
crisis, though the Bank of Canada has plenty of tools in its kit
to stimulate the economy. Carney reminded his audience of the
bank's contingency plan for credit and quantitative easing,
unveiled at the height of the crisis but never used.
"I would say that the evidence from the U.S., the evidence
from the U.K., to some extent from Switzerland where they've
done it in a slightly different way but the same concept, has
been that these policies are effective," he said.
In any case, Carney was encouraged by what he heard from
European leaders at a G20 summit in Mexico this week,
particularly their support for a European banking union and
closer fiscal integration over time.
"It's a mistake to underestimate the resolve of European
leaders to address these issues," he said.