Dodge May Keep Rates Steady for Longest Stretch in 54 Years
Bank of Canada Governor David Dodge may keep interest rates unchanged for the longest stretch in five decades as inflation is tempered by a slump in U.S. demand for Canadian exports.Dodge, nearing the end of his seven-year term, will probably keep the benchmark rate at 4.25 percent tomorrow for the seventh-straight meeting. Some economists predict no interest rate changes before Dodge’s term ends in January, capping the longest pause since 1954.
“It’s almost an ideal world for the Bank of Canada,” said Doug Porter, an economist with BMO Capital Markets in Toronto. Core inflation, which discounts items such as fruit and gasoline, hovers near Dodge’s 2 percent target, and the economy’s “close to full capacity,” he said.
The world’s eighth-biggest economy has remained stable during global turmoil in part because Dodge hasn’t overreacted to events such as the fastest rise in the Canadian dollar since World War II. The currency’s surge prompted manufacturers such as jetmaker Bombardier Inc. to push for lower borrowing costs.
“Rates have been relatively stable given the massive shocks hitting the global economy,” said John Johnston, who helps manage about $2.6 billion in Toronto as chief strategist at the Harbour Group, a unit of Royal Bank of Canada. “It reflects a maturing of the bank’s monetary strategies.”
Lessons From 2003
Dodge, 63, may have learned from April 2003 when he tightened only to ease in July, underestimating the impact of slower U.S. auto imports and outbreaks of SARS and mad-cow diseases. The central banker left rates alone last May as investors called for an eighth-straight increase, and again at the end of 2006 as exporters lobbied for a reduction.
The bank’s six-member governing council, led by Dodge, deserves praise for “keeping the economy on a pretty good even keel,” said Dale Orr, Toronto-based managing director of Canadian research for Global Insight, a forecasting firm. “There is a reasonable amount of judgment involved, so you can give them credit.”
Since July, Dodge has said the risk of inflation veering from his target is balanced by stronger consumer spending and weaker U.S. demand for Canadian goods. Monthly data has so far borne this out, with core inflation between 2 percent and 2.4 percent, even with the jobless rate at a three-decade low.
If the bank keeps the overnight rate at 4.25 percent tomorrow, the pause would surpass a 2004-2005 stretch, and rival an 18-month run that ended in March 1973. Pausing through Jan. 31, when Dodge’s term ends, would extend it to 20 months, a streak not seen since the first governor, Graham Towers, retired in 1954.
All 22 economists in an April 19 Bloomberg survey forecast no rate change tomorrow.
Safest Thing
Dodge, who meets the bank’s board in June to discuss his future, will also keep rates unchanged through the first quarter of 2008, according to the median estimate of 11 economists surveyed by Bloomberg News April 4-9.
“The safest thing to do is nothing,” said Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York, who predicts no rate change this year. “There are two diverse and opposing sets of forces the bank has to deal with,” namely strong growth in oil-rich Alberta and slower growth in manufacturing-heavy Ontario and Quebec, he said.
The economy may not stay close to capacity. Some forecasters predict a strong dollar, trading close to a five- month high, and sluggish labor productivity will limit economic growth to 2.3 percent this year, according to a Bloomberg survey. That pace is half a percentage point below what the central bank says the economy can tolerate before inflation accelerates.
`Slowdown Contained’
Still, the slowdown has been limited to exports of lumber and other housing-related materials, said Jonathan Basile, an economist at Credit Suisse in New York. “Canada still has a lot of natural resources that will be in demand for a long time,” he said.
Some investors are betting any rate move this year would be an increase. They point to the 6.1 percent jobless rate and February’s core inflation rate of 2.4 percent, a four-year high. The yield on the December bankers’ acceptance contract, tied in part to the central bank rate, rose to 4.42 percent April 19, from 3.97 percent March 7 on the Montreal Exchange.
Dodge, who hasn’t indicated whether he’d seek a second term, says he isn’t focused on the long pause in rate moves.
“What we are trying to do, always, is to have monetary conditions such that we will hit our inflation targets,” Dodge said in an April 13 interview in Washington during a meeting of the Group of Seven industrialized nations. “What it reflects is exactly what we’ve said, that we think that they are appropriate to do that.”