External, economic factors likely to stay Carney's hand again on interest rates

OTTAWA – The Bank of Canada is almost certain to keep its trendsetting target interest rate at one per cent when it announces its latest policy setting at 9 a.m. Tuesday.

That, despite the fact that bank governor Mark Carney has made it abundantly clear for months that he is uncomfortable with the rate at such a low level.

The last time Carney raised the trendsetting rate was in September 2010.

The bank’s monetary setting influences short-term borrowing costs and, to some extent, longer-term rates as well and the current low rates is seen to have contributed to the steady rise in household indebtedness since the recession.

With the ratio now at 151 per cent of income, Canadians have never been so indebted, Carney lamented recently, citing the potential economic impact if housing prices fall or interest rates rise.

Some economists believe Carney’s eagerness to return to a more normal benchmark — in the 2.5 to 3.5 per cent range — will express itself as early as the next announcement date in June.

That minority expectation will likely build if the central bank boosts its forecast for the economy this year from January’s low-ball 2.0 per cent figure.

But most analysts say there would need to be a wholesale revision of Canada’s near-term economic prospects to warrant raising rates.

With the U.S. Federal Reserve on hold at near zero likely until 2014, widening the interest rate gap between the two close trading partners would not only slow Canada’s domestic economy but also lift the dollar and price some manufactured exports out of their markets.

A consensus view among 12 economists with the C.D. Howe Institute monetary policy council sees rates remaining where they are for another six months at a minimum.