Bank of Canada
Bank of Canada Governor Mark Carney said an economic recovery in the U.S., which buys about three quarters of Canadian exports, is likely to be “muted.''
Carney, who took office in February, is trying to assess the effects of a potential recession in the U.S. even as spending by Canadians remains strong and near-record commodity prices fuel an investment boom that is driving up wages at the fastest pace in more than a decade.
“The world's largest economy is slowing and there is the prospect that the recovery from that slowdown will be more muted,'' Carney said in an interview at the International Monetary Fund building in Washington.
The Bank of Canada cut its benchmark lending rate by half a point to 3.5 percent on March 4, the biggest reduction since 2001, and signaled further easing may be needed. Policy makers next meet on April 22.
Carney, 43, said that while he's “mindful'' of developments in the Canada's labor market, the central bank takes into account a “number of factors'' when setting policy, including financial market conditions.
`Unlikely to Return'
Policy makers have cut the benchmark rate by a percentage point since December. Still, reluctance by banks to lend means companies are paying as much as 75 basis points, or 0.75 percentage point, more to borrow than before the financial turmoil started, Toronto-Dominion Bank said in a March 19 report.
Borrowers will continue to pay higher funding costs for debt even after the turmoil in global credit markets recedes as banks scale back riskier lending, Carney said cash till payday.
“The end, which is a ways off, is going to be a world with considerably less leverage,'' Carney said. The spreads on loans for the safest securities and the cost of funding for riskier borrowers is “unlikely to return to the levels they were in the period before last summer.''
The potential spillover of a U.S. recession into other countries may threaten to curb global demand for Canada's commodities, Carney said.
“All things being equal, a slowdown in the U.S. economy will have a damping effect on commodity prices,'' he said.
Inflation
Canada is among the world's 10 largest producers of oil and natural gas, and is a major exporter of fertilizer, wheat, metal ores and alloys such as nickel.
Slowing inflation may give Carney more room to cut borrowing costs. The inflation rate fell below the central bank's 2 percent target in February as the Canadian dollar's appreciation made U.S. imports cheaper.
Economists expect the central bank will cut lending rates by 75 basis points more by the end of the second quarter, according to the median of 14 responses in a Bloomberg survey.
Canada and the U.S. are the world's biggest trading partners.
Filed under: legal by Guru