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Winnipeg Free Press - PRINT EDITION

Chorus predicts rate hike today, but doomsayers remain

By: Julian Beltrame

Posted: 07/20/2010 1:00 AM | Comments: 0 (including replies)

OTTAWA -- Bank of Canada governor Mark Carney has seldom heard such unanimity about what he should do about interest rates at a time of economic uncertainty.

The consensus of 12 economists surveyed is that the governor will hike the policy rate by a quarter point for the second time in as many months today to 0.75 per cent, still an extremely low level.

It's the same verdict for the 11 private sector and academic analysts who made up the C.D. Howe Institute's monetary policy council this month -- all casting their vote for further rate increases. Four even called for a half-point jump to one per cent.

As well, the markets have priced in a quarter-point hike for weeks.

But a few bearish economists are urging Carney to ignore the dubious wisdom of crowds, warning of potential danger if he succumbs to the pressure to raise borrowing costs as the economy is starting to recover from recession.

"I don't believe the case for hiking rates is valid, and I think Canada will pay for this," says Carl Weinberg, chief economist with U.S.-based High Frequency Economics.

Higher interest rates drive the cost of borrowing higher, discouraging consumer spending and business investment that are key to economic growth. As well, Canada will open up a three-quarter-point interest rate differential with the U.S., which will raise the value of the loonie and squeeze Canadian exports to the United States.

"You could push the economy back down into the hole again," Weinberg warns.

Brian Bethune of IHS Global Insight concurs, saying Carney's first mistake was to signal a leaning toward higher rates in April, then following through with the first rate hike in three years on June 1.

The result was markets pushed up mortgage rates in the spring by a full point percentage point, helping to kill off the housing rally, which had been a key driver of Canadian growth.

Carney himself appeared to express some reticence last month, noting the global recovery was uneven and in advanced economies, "heavily dependent" on government and central bank stimulus. He wrapped up by cautioning against counting on a second hike on July 20, as many had and still do.

"Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments," he advised.

Since, almost all indicators have gone south. Along with the European debt worries is concern that the U.S. may be heading toward a double-dip recession. China has advised its growth will be more moderate going forward.

-- The Canadian Press

Republished from the Winnipeg Free Press print edition July 20, 2010 B7

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