Carney Says Canada Bank Won
Bank of Canada Governor Mark Carney said policy makers won't be “complacent'' as inflation in the country accelerates, even if it means surprising investors as they did with last week's rate decision.
The cost of goods such as gold and wheat rose 10 percent between the bank's April forecast and its latest rate decision and crude oil futures prices “moved sharply higher,'' Carney, 43, said in a speech last night in Calgary.
“In the face of the largest commodity-price shock in our lifetimes, we cannot be complacent,'' Carney said.
Carney will probably keep borrowing costs unchanged through at least October, according to economists surveyed by Bloomberg. The central bank unexpectedly kept the main lending rate unchanged at 3 percent on June 10, after four straight reductions since December to stimulate an economy struggling with credit shortages and falling exports.
“The situation wasn't ideal but the bottom line is we are going to take the right decision'' to control inflation, Carney told reporters after his speech. The key interest rate is “appropriate,'' he said.
The central bank sets interest rates to keep inflation between 1 percent and 3 percent, with an optimal target of 2 percent. Inflation accelerated for a second straight month in May as gasoline prices surged, Statistics Canada said today. Consumer prices rose 2.2 percent from a year earlier, the fastest since January.
`Evenly Balanced'
Inflation risks in Canada are “now judged to be evenly balanced,'' Carney said in the speech. The Bank of Canada will keep monitoring inflation expectations and the Canadian and global economies, he said.
Energy costs threaten to push inflation above 3 percent, the upper limit of the bank's target range, Carney said, repeating the assessment given when policy makers released the June 10 decision quick payday loan. Inflation hasn't exceeded 3 percent since September 2005.
The speech “puts up a relatively spirited defense of the immediate issue of why the Bank of Canada chose to keep rates on hold last week and re-affirms an official neutral bias,'' Mark Chandler, a senior fixed-income strategist in Toronto at RBC Capital Markets, a unit of Canada's largest bank, wrote in a note to clients. “It is hard not to assume that there is a 'soft' bias towards tightening in the current environment,'' he wrote.
Canada's decision to focus more on food and energy prices than economic growth, which contracted in the first quarter for the first time since 2003, brought Canadian monetary policy into line with counterparts in the U.K. and the U.S.
Best Guide
The Bank of Canada will monitor whether the so-called core inflation rate remains the best guide to future price trends, Carney said. The core rate excludes eight volatile items such as fresh fruit and some energy products, and in the past higher commodity prices haven't led to persistent inflation throughout the economy, he said.
Carney called the latest surge in commodity prices a “super cycle,'' and said developing nations such as China are becoming more important in determining costs for the rest of the world because they lead growth in consumption.
Most of the rise in commodity prices is due to a combination of “strong demand and weak supply,'' Carney said.
Still, he said Canada's government should refrain from spending as if its revenue windfall from high energy prices will last “indefinitely,'' and learn from the 1980s when another boom ended with large budget deficits, Carney said.
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