INTEREST RATES: Bank of Canada poised to raise interest rates

Mark Carney is likely to raise borrowing costs for the second straight time Tuesday, while continuing to sound a cautious tone as belt-tightening in Europe, efforts to restrain China’s growth, and plunging consumer confidence in the U.S. cast a pall over Canada’s prospects.

All 12 primary securities dealers and most economists say the central-bank governor will lift his main interest rate by another 25 basis points, to 0.75 per cent. The labour market has recouped most of the jobs lost during the recession and companies are seeing better demand, suggesting the private sector will be able to lead economic growth after federal and provincial stimulus largesse runs out later this year.

Investors are less confident about later decisions, and that may not change this week because Mr. Carney is likely to reiterate that his path to a more neutral, pre-crisis policy stance depends on the developing economic stories around the world.

An initial clue to his thinking will come Tuesday in the statement on his rate decision, which will include highlights from a comprehensive forecast that he’ll release Thursday. Those forecasts could point to a slower, more grinding recovery both here and abroad, economists say.

"There are too many things going on: there’s the European situation; China’s sort of slowing down; even within Canada it looks like the housing sector – which was the thing that really powered us out of the recession – seems to be slowing," Stephen Gordon, an economics professor at Laval University in Quebec City, said in an interview.

"There are all kinds reasons to think that rates of growth will be slower, but that’s a long way from talking about a double-dip," Mr. Gordon said.

Even against that backdrop, economists say there will be at least a few more rate hikes in a row, since Canadian inflation isn’t very far from policy makers’ 2-per-cent target and the economy is the envy of the Group of Seven. Most predict the Bank of Canada will finish the year with a benchmark rate at a still-historically-low 1.25 per cent or 1.5 per cent, as policy makers move cautiously and gauge whether Canada might be pulled into another downturn despite its comparative strength.

"The domestic situation is arguing for a fairly aggressive increase in rates, but the foreign situation is providing either heightened risks around that or a case to dampen that aggressiveness," said Chris Ragan, a former visiting economist at the Finance Department who is now the David Dodge Chair in monetary policy studies at the C.D. Howe Institute. "The question is how much weight they put on those foreign forces."

A quarterly survey of Canadian executives that the central bank released a week ago showed businesses are still confident and slack in the economy is being chewed up more quickly, but firms are girding for a period of soft growth amid worrisome signs from abroad, and "possible spillover effects in Canada."

Even before things started to look shakier around the world, Mr. Carney had started warning that Canada’s rebound from the crisis would slow considerably over the rest of the year due to a cooler housing market, the currency trading near parity with the U.S. dollar and the smaller and smaller boost from government spending.

After releasing his last quarterly forecast on April 22, he started urging markets and borrowers to view nothing about his tightening campaign as "pre-ordained." And as the European debt crisis worsened in the weeks leading up to his June 1 rate hike, Mr. Carney’s own comfort level with his already tentative forecasts seemed to be chipping away.

Saying that any future interest rate hikes would need to be "weighed carefully against domestic and global economic developments," he cited Europe and its fiscal mess no fewer than four times in the page-long statement about his decision. Later that month, the central bank warned in a report that while Canada’s financial system is functioning well, it is more vulnerable than six months ago, because of potential fallout from Europe and "severe tensions" in global markets.

(prepared by Jeremy Torobin/Globe & Mail)