Economy down, but Carney unlikely to change tune of interest rate policy

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OTTAWA - Canada's sudden loss of economic momentum is unlikely to sway the Bank of Canada to alter course on interest rates today, economists say.

But the central bank likely won't be able to smooth over many more negative surprises.

Economists are unanimous in the belief that governor Mark Carney will keep the central bank's trendsetting policy rate at one per cent when the decision is announced at 9 a.m. EST.

But perhaps somewhat surprisingly, the consensus is almost as solid that Carney, who recently announced he will leave for England in June, will keep in place his extremely timid policy bias that interest rates will need to rise "over time."

The "over time" language was added by Carney in October and was interpreted as a marginally less hawkish view on rate hikes.

Noting that the Bank of Canada changes direction about as swiftly as an ocean liner, most economists believe it is too soon for another signal shift.

"We do not foresee any material change to the rhetoric, but the assessment of recent performance and the current balance of risk will be key to watch for any potential shift in bias," said Jimmy Jean of Desjardins Capital Markets.

Still, there is no doubt Carney's fervour for moving rates up has likely cooled.

The C.D. Howe Institute's informal policy council recommended Thursday that rates not only stay put today, but that they should remain at one per cent one year from now. That is the first time since March that the panel of economists has judged that conditions should remain unchanged 12 months out.

The reason for the more dovish talk, of course, was Friday's disappointing 0.6 per cent gross domestic product performance, well off the central bank's call of a one per cent advance.

Worst still, two long-standing pillars of strength — business investment and housing — both contracted sharply.

The key takeaway from the GDP report was that the economy's output gap is not closing, but growing, giving the central bank little reason to apply the brakes.

On Monday, Finance Minister Jim Flaherty characterized the slowdown as temporary, but also cautioned that Canadians should not expect dramatic growth going forward.

"It's a time in which we are going to be buffeted, there's going to some months better than others, but overall we will be OK with modest growth next year," he said.

That's been the case for more than two years now, which is as long as the Bank of Canada has kept the policy interest rate moored at one per cent.

Organizations: Bank of Canada, Desjardins Capital Markets, C.D. Howe Institute

Geographic location: OTTAWA, Canada, England

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