Canada Leaves Key Rate at 3%, Saying It Remains `Appropriate'

By Greg Quinn

Sept. 3 (Bloomberg) -- The Bank of Canada left its key lending rate unchanged, saying it remains ``appropriately accommodative'' amid slower-than-expected economic growth.

Governor Mark Carney and his five deputies kept the target rate on overnight loans between commercial banks at 3 percent for a third straight meeting, a decision predicted by 27 of 28 economists surveyed by Bloomberg.

Carney and his counterparts from the Group of Seven industrialized nations are struggling to sustain growth as high energy costs propel inflation and curb demand. Canada's economy grew at a 0.3 percent annualized pace in the second quarter, avoiding what most economists would have dubbed the first recession since 1991. Inflation surged to 3.4 percent in July, outside the bank's 1 to 3 percent target range.

``Economic activity is slightly lower than expected,'' the central bank said today in a statement, referring to its July quarterly forecast, ``but still close to the economy's production capacity.''

The statement dropped a reference from the bank's July 15 decision that said inflation risks were ``balanced.'' While saying this time that growth will be slower than expected, policy makers also said the consumer price index won't ``spike'' as high as projected in July because energy costs have waned, and inflation will return to the bank's 2 percent target next year as expected.

``Their internal thinking is they are on hold for a long time, through 2008,'' Don Drummond, chief economist at Toronto- Dominion Bank, said last week. ``You are talking about moving a really big rock and I don't think there's much that would move that one.''

Rate Cuts

The bank may cut rates in the first quarter of next year, according to the weighted average of eight economists surveyed by Bloomberg. Today, policy makers said ``the current level of the target for the overnight rate remains appropriately accommodative.''

While the bank said a drop in Canada's currency will help Canadian goods and services, policy makers also said the country's products will be hurt by ``weaker global growth.''

Also, there's little sign slumping exports to the U.S. will rebound. Sales to Canada's main trading partner were behind Carney's assertion in July that the economy will grow just 1 percent this year, the slowest since 1992.

The U.S. economy grew at a 0.2 percent annualized pace in the second quarter excluding trade, indicating there's been little growth in American domestic demand as that country recovers from the subprime mortgage meltdown.

Exports

Canada's total shipments abroad fell 1.5 percent in the second quarter, the fourth straight three-month period that saw a decline. Exporters were also hurt by the Canadian dollar's appreciation to a record last year.

Deere & Co., the world's largest maker of farm equipment, said yesterday it will close an 800-worker utility-vehicle manufacturing plant in Welland, Ontario. The work will be transferred to Wisconsin and Mexico.

Canadian factories laid off 32,300 people in July, mostly in Ontario, where the struggling automotive industry is based. Total Canadian employment fell by a net 55,200 workers, the biggest decline in 17 years.

The layoffs, coupled with high gasoline prices, are crimping the spending Carney and Conservative Party Prime Minister Stephen Harper need to sustain growth.

Harper, 49, may call elections this week because he says Canada's minority-led Parliament isn't working. Liberal Party Leader Stephane Dion, head of the biggest opposition bloc, says Harper wants a vote now to try and win a fresh mandate before the economy worsens.

Household Spending

Already, growth in spending by households slowed for a second straight quarter from April to June to 0.6 percent on lower car and truck purchases, Statistics Canada said Aug. 29.

The central bank's mandate is to keep inflation at 2 percent as often as possible and always between 1 percent and 3 percent. July's rate was the fastest since 2003, and the bank says inflation will peak at 4.3 percent in the first quarter of 2009 before returning to 2 percent later that year.

Retail gasoline prices though have eased from a peak of C$1.39 per liter in mid-July to C$1.28 last week. Crude oil fell to a five-month low yesterday as energy firms prepared to resume production after Hurricane Gustav caused less damage than anticipated.

Inflation could recede faster than forecast, such as in 2003 when energy pushed the rate above 4 percent and it slowed to the bank's target within six months.

Elsewhere in the G-7, Japan's economy, the world's second- largest, shrank at a 2.4 percent pace in the second quarter. The European Union's shrank 0.2 percent, the first contraction since the introduction of the euro almost a decade ago.

The European Central Bank and Bank of England have rate decisions tomorrow. Economists say both will stay on hold.

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net.