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Carney set to keep powder dry, stand pat on rates

With Europe on the brink of recession and the U.S. economy showing signs of life, Mark Carney is stuck in the middle of some increasingly mixed economic signals.

The Bank of Canada Governor is widely expected to leave his 1-per-cent benchmark interest rate intact Tuesday at his first decision of the year, reflecting a tentative global backdrop that has kept him on the sidelines since September of 2010 and could keep him on hold all year. The next day, he and his policy team will release a quarterly forecast that attempts to outline where things are going over the next year or two, a task that is getting harder as the months go by.

Canada's labour market is flat-lining and the housing market is showing signs of cooling, even as exporters benefit from a rebounding U.S. economy, which is creating jobs at a faster pace. Meanwhile, Europe's debt crisis and slowing economy are crippling demand across the continent and hurting U.S. and Chinese exporters in the process.

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With all of these variables at play, economists maintain the safest route for the Bank of Canada is to wait them out.

"The trickiness of policy is there are some big potential unknowns that really aren't much better known than when they did their last forecast, like the European situation," Avery Shenfeld, chief economist at CIBC World Markets, said last week. The C.D. Howe Institute's shadow council on monetary policy, to which Mr. Shenfeld belongs, recommended that Mr. Carney stay put on rates for at least another six months.

"An orderly resolution of Europe's problems," the council said, depends on "too many political and economic circumstances to work out well simultaneously." As a result, it said, "the likelihood of bad news on that front" should guide the Bank of Canada.

On the flip side, Mr. Carney may be encouraged by some relatively positive data in recent weeks out of the U.S., which still matters most for Canadian exporters.

"That's one thing we feel pretty good about, that the U.S. market is not likely to continue to grind downward, which is what we've been dealing with for some time," said Mel Svendsen, CEO of Standen's Ltd., a Calgary-based manufacturer that makes vehicle springs for trucks and trailers used in the automobile and farm equipment industry.

Still, Standen's has been investing "pretty heavily" in China, since that's where it anticipates seeing the most growth in the next few years, Mr. Svendsen said.

The U.S. economy remains fragile. The Commerce Department reported last Friday that American exports took a spill in November due to a drop in sales to European customers, tempering economists' enthusiasm about a strong Canadian trade report from the same month. And U.S. retail figures from December suggest consumer spending has started to slow.

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Mr. Carney's forecast is expected to show Canada did better than anticipated in the second half of 2011, and he will likely repeat that there is "considerable" monetary stimulus in place – a reminder that his next rate move, whenever that is, will likely be an increase. But, economists say, he will also stress the "downside" external risks to the economy and reiterate that he expects inflation to ease.

At the same time, investors and economists have scaled back bets that Mr. Carney will cut interest rates. Unless, that is, the European situation deteriorates significantly.

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About the Author
Economics/business writer

Jeremy has covered Canadian and international economics at The Globe and Mail since late 2009. More

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