Speedy economic recovery has Carney hinting of a rate rise

Canada's recovery is picking up faster than expected, forcing Mark Carney to set the stage for higher interest rates sooner than many overstretched consumers were bargaining for.

The Bank of Canada Governor hinted at an earlier-than-anticipated rate increase as he boosted his outlook for the economy Tuesday and, yet again, warned that personal debts are too high and likely to keep rising.

In separate assessments, both the central bank and the International Monetary Fund lifted their Canadian forecasts for the year, adding to evidence that a slightly better global backdrop is benefiting the labour market and boosting business confidence.

The more optimistic take reflects a view that the rebound in the United States, Canada's chief export market, is gaining strength and the euro crisis, while not resolved, is not as urgent a threat to the world economy. Economists now believe Mr. Carney could start raising his key rate before the end of the year – a dramatic shift in expectations – after sitting at a near-emergency 1 per cent since September, 2010. Still, most believe he will move at a cautious, gradual pace.

On Tuesday in Ottawa, Mr. Carney left his key rate untouched for a 13th consecutive decision.

However, he capped weeks of sunnier rhetoric about the economy with the first clear hint since last summer that hikes are in the offing, saying "some modest withdrawal of the present considerable monetary policy stimulus may become appropriate," while adding the "timing and degree" of moves will depend on developments in the coming weeks.

That wiggle room could prove crucial as Mr. Carney tries to ensure inflation stays under control as the economy strengthens, without snuffing out the consumer spending and business investment that will be crucial to the country's growth over the next couple of years as governments cut back.

And with the U.S. Federal Reserve Board expected to be stuck at near-zero rates until 2014, there is a limit to how far Canadian rates can rise without sending the currency skyward. In response to Mr. Carney's mere hint of higher rates on Tuesday, the loonie shot up more than a full cent against the U.S. dollar.

Mr. Carney and his policy team will release a quarterly forecast Wednesday morning, followed by a press conference, but Tuesday's decision included some highlights.

The bank boosted its 2012 growth forecast for Canada to 2.4 per cent, from 2 per cent in January. While it cut its 2013 forecast to 2.4 per cent from 2.8 per cent, policy makers said the economy will be back at full tilt in the first half of 2013, instead of in the third quarter of that year.

Meanwhile, the IMF boosted its forecast for global growth for the first time in more than a year, and upgraded its projections for Canada over the next two years.

The Washington-based fund now sees Canada's economy growing 2.1 per cent this year, instead of its January call of 1.7 per cent, and 2.2 per cent in 2013, instead of 2 per cent.

The housing market "is an area of potential vulnerability" owing to high prices and rising household debt, the IMF warned. Even as the United States economy improves and the euro crisis looks more stable, it noted, Canada would be affected should either of those situations change.

Lingering uncertainties help to explain why a few economists were unconvinced Tuesday that Mr. Carney will actually raise rates in the near future. Last July, they note, he gave a strong signal that higher rates were coming, only to reverse that stance in September after debt dramas on either side of the Atlantic threatened the global rebound.

"It won't take much of a disappointment in growth for the Bank to further delay this next round of rate hikes," said Avery Shenfeld, chief economist at CIBC World Markets.

Some, though, believe the first hike could come as early as this summer if conditions continue to improve.

"The bigger the imbalances are, the bigger the shock when you start to come back to normal," said Charles St-Arnaud, a Canada specialist at Nomura Securities in New York. "But it will be very data-dependent, and it will be a very slow rise in rates."

CARNEY IN DEMAND

The Financial Times reported late Tuesday that Bank of Canada Governor Mark Carney had been "informally approached" as a possible candidate to replace Mervyn King as Governor of the Bank of England next June. According to the Financial Times, which cited three unnamed people involved in the process, an overture to Mr. Carney was made by a member of the British central bank's court, a mainly non-executive body that oversees its activities.

In an e-mailed statement, Bank of Canada spokesman Jeremy Harrison said the FT report "is not accurate."

The internationally respected Mr. Carney is Canadian, but is married to a British woman, worked in London as an investment banker for Goldman Sachs & Co., and holds a doctorate in economics from Oxford University. Still, appointing an outsider from a foreign country would be highly unusual for any central bank, and observers reached Tuesday evening discounted the possibility that Mr. Carney, whose seven-year term ends in early 2015, would entertain such a move.

Mr. Carney is also head of the Financial Stability Board – a G20-linked body that it is co-ordinating a push to toughen the rules of global finance.

Jeremy Torobin