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Bank of Canada's Poloz headed for longest rate pause since World War II

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Stephen Poloz is poised to extend the Bank of Canada’s interest-rate pause to the longest since World War II, helping Canadian bond yields resist the pressure of prospective tightening by the U.S. Federal Reserve.

Poloz will keep his benchmark overnight rate at 1 percent Dec. 3 according to all 22 economists surveyed by Bloomberg News through Nov. 28, stretching the pause that began with Mark Carney in 2010. That would make it the longest since February 1944 to September 1950, exceeding the October 1950 to January 1955 hiatus.

The period of unchanged rates “does say something about the depth of the financial crisis and the anemic recovery,” said Eric Lascelles, chief economist at Royal Bank of Canada Global Asset Management in Toronto. Yields in Canada “can remain below the U.S. and that spread can even widen a little bit,” as Poloz lags the Fed in tightening policy, he said.

Diverging interest rates in 2015 would help Canadian bonds outperform the U.S. for a fourth straight year, according to Bank of America Merrill Lynch data. Ten-year Canadian yields will rise to 2.5 percent over the next year from 1.86 percent Nov. 28, less than the U.S. increase to 3 percent from 2.16 percent, according to Lascelles.

While Fed policy makers debate the language they might use to flag potential policy-rate increases, their Canadian counterparts say they remain focused on providing stimulus to bring the world’s 11th-largest economy back to full output over the next two years.

Canada’s economic growth slowed to a 2.8 percent annualized pace in the third quarter from 3.6 percent the prior three months, Statistics Canada reported Nov. 28. In contrast, U.S. growth came in at 3.9 percent.

DOLLAR BOOST

Raising rates ahead of the Fed would also risk hurting exports by boosting Canada’s dollar, Lascelles said.

“Canadian rates exist in a global context,” he said. “As we saw over the last several years, to do anything out of line with the U.S. behemoth is to introduce remarkable currency strength that is quite undesirable for Canada.”

Canada’s dollar has depreciated by about 10 percent since Poloz took office in June 2013, in part because he dropped Carney’s language about the potential need for tighter policy.

Poloz won’t raise rates until the fourth quarter of next year, according to a Bloomberg economist survey. The quarter- point increase forecast for Canada compares with an estimated Fed move to 1 percent from 0.25 percent over that time.

The anticipation of rising Fed rates has is already helping keep Canadian bond yields lower than Treasuries. Canada’s five- year bonds had a 1.35 percent yield at 9:25 a.m. Toronto time today, while similar Treasuries yielded 1.46 percent.

PERFORMING BETTER

Still, there are signs Canada’s economy is performing better than Poloz forecast. Unemployment has fallen to a six- year low and inflation has exceeded the central bank’s projections.

“Our judgment is that we have considerable excess capacity and that continued monetary stimulus is needed to close the gap and bring inflation sustainably to target,” Poloz told the House of Commons Finance Committee Nov 4.

The recovery still needs monetary policy support, particularly because of the impact from the falling price of crude oil, a top Canada export, said Sebastien Lavoie, assistant chief economist at Laurentian Bank Securities in Montreal.

“The Bank of Canada is likely to stay very cautious in its statement next Wednesday,” Lavoie, a former central bank researcher, wrote in a research note.

POSTWAR PERIOD

Today’s 1 percent policy rate is lower than the 1.5 percent rate set in 1944, when then-Governor Graham Towers cut it from 2.5 percent. Carney lowered Canada’s key rate to a record 0.25 percent in 2009 during the global financial crisis and raised it to 1 percent in September 2010.

The longest period of unchanged rates was from January 1935 to January 1944, when the key rate was 2.5 percent, according to Bank of Canada records.

The period from 1944 to 1950 was pivotal for Canada, from its participation in the D-Day invasion of Nazi-occupied France to the postwar economic transformation.

Poloz said in an interview last year that he’s more concerned about restoring the economy’s health than avoiding a prolonged pause.

“We’ve got a job to do,” Poloz said at the time, speaking in a boardroom with portraits of former governors over his shoulder. “We’re going to do what we can to make sure inflation gets back to normal, the economy gets back to normal.”

“We’re not going to do something silly here just because it’s been a long time.”

Canadian consumer confidence increased last week as views about personal finances rose to the highest in more than a month.

The Bloomberg Nanos Canadian Confidence Index increased to 58.0 in the week ended Nov. 28, up from 57.4 the previous week. Sub-indexes tracking views of the economy and real estate also rose, while sentiment about job security dropped.

Consumer confidence is hovering around its 12-month average amid mixed signals about the strength of the world’s 11th largest economy. While output grew faster than economists forecast in the July-September period, growth still slowed from the second quarter’s 3.6 percent pace.

“Forward views on the strength of the Canadian economy remain net negative,” Nanos Research Group Chairman Nik Nanos said of the consumer confidence data.

Bank of Canada Governor Stephen Poloz has said a shift to growth powered by exports and business investment is key to erasing economic slack. Exports grew at a 6.9 percent annualized pace in the third quarter, while business gross fixed capital formation expanded 5.9 percent, Statistics Canada reported Nov. 28.

The Canadian dollar has slumped about 6.5 percent this year amid a selloff in crude, Canada’s biggest export. Canadian energy stocks fell 7.7 percent this year through November, amid an 8.3 percent increase in the nation’s benchmark Standard & Poor’s/TSX Composite Index.

The Bank of Canada will make its next interest-rate announcement Dec. 3. All 22 economists surveyed by Bloomberg News expect the central bank to maintain its benchmark interest rate at 1 percent, where it has been since September 2010.

JOBS, TRADE

Statistics Canada will report employment figures for November and merchandise trade data for October on Dec. 5.

The Nanos gauge has two sub-indexes. The Expectations Index, which is based on responses about the outlook for real estate and the national economy, rose last week to 55.3 from 54.7. The Pocketbook Index, based on responses about job security and personal finances, increased to 60.7 from 60.1.

The share of Canadians who think the economy will improve over the next six months climbed to 19.0 percent in the week ended Nov. 28 from 18.8 percent. The gauge has averaged 20.6 percent this year.

The percentage of those who think home prices will increase in the next six months rose to 38.5 from 38.4 the prior week. That measure has averaged 40.2 this year. Those who see prices falling accounted for 12.1 percent of respondents, down from 12.2 the previous week.

The proportion of respondents who say they’re better off financially in the past year increased to 19.7 percent from 19.2 percent. The gauge has averaged 19.6 percent this year.

Respondents who describe their jobs as at least somewhat secure dropped to 69.6 percent, from 70.1 percent. The 2014 average is 67.6 percent.

The Nanos index is derived from weekly polling based on phone interviews with 1,000 people, using a four-week rolling average of 250 respondents. The results are accurate to within 3.1 percentage points, 19 times out of 20.

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