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article imageMark Carney: Interest rate hike warnings being heard by Canadians Special

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By Andrew Moran     Dec 11, 2012 in Business
Toronto - Bank of Canada Governor Mark Carney delivered a speech to the Toronto CFA Society where he discussed guidance of central bank policies. Carney stressed the importance of transparency in monetary policy and the market’s response to the interest rates.
The outgoing Bank of Canada head told an audience Tuesday that central banks maintain policies that are transparent in nature and are held accountable to democratic nations. Carney iterated that by having open communications it can improve monetary policy and its effectiveness in two areas: what are the achievement goals and how to achieve them.
In his speech, Carney noted that the Bank of Canada has become more translucent when talking about the various forces that affect the nation’s economy. This, Carney said, assists households, companies and individuals in the finance market understand how monetary policy will react over a period of time.
Furthermore, the central bank governor stated that unambiguous monetary policy guidelines are quite functional at “extraordinary times,” which prompted him to note Apr. 2009 when the Bank of Canada issued additional stimulus by making the interest rates quite low.
“In a perfect world, guidance would be unnecessary. The inherent uncertainty in economic outcomes and thus in the policy path would be widely understood,” explained Carney. With full information and efficient markets, monetary policy expectations would effectively take care of themselves – knowing a central bank’s inflation objective and its reaction function would be sufficient for markets and the public to form and evolve their expectations, without the need for any direct guidance from the central bank.”
However, he noted that too much openness can lead to negativity in the market because a central bank’s credibility is important and its guidance is not a definitive “promise.”
Carney added that his consistent warnings regarding interest rate increases could very well be swaying the types of mortgages that potential homeowners purchase. For example, the number of fixed-rate mortgages has doubled to 90 percent in 2012, while variable-rate mortgages have decreased this year.
“Our guidance indicates that some policy action may be necessary, encouraging a degree of prudence in household borrowing,” said Carney. “The share of new fixed-rate mortgages has almost doubled to 90 percent this year, reflecting the combination of attractively priced fixed-rate mortgages and the tightening bias of the Bank of Canada.”
To institute record low interest rate levels, the central bank sacrificed certainty and duration. “The bank's conditional commitment succeeded in changing market expectations of the future path of interest rates, providing the desired stimulus and thereby underpinning a rebound in growth and inflation in Canada.”
Citing the United States Federal Reserve’s vow to keep interest rates unchanged until the beginning of 2016, Carney warned that central banks should very well coalesce economic growth levels with precise action by monetary experts at the Bank of Canada. He did say, though, that there is a danger involved with such decisions because it would have to gratify the down periods in an economic environment that is full of uncertainty.
Digital Journal reported last month that Carney will be leaving the Bank of Canada on July 1. From there, he will take the top job at the Bank of England, where it is most likely he will implement the same monetary policy he has done over the past five years.
“This is a critical time for the British, European and global economies; a decisive period for reform of the global financial system including its leading financial centre, the City of London; and a crucial point in the Bank of England’s history as it accepts vital new responsibilities,” Carney said in a statement released at the time.
A successor has yet been chosen, but the Board of Directors will soon establish a Special Committee to undergo a recruitment process for the next Bank of Canada governor, which is then appointed by the independent directors and approved by the Minister of Finance and federal cabinet ministers.
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