By Ka Yan Ng
CHARLOTTETOWN Prince Edward Island (Reuters) - Bank of Canada Governor Mark Carney cautioned investors on Wednesday not to take another interest rate hike for granted, saying volatile global conditions meant no particular path for monetary policy was preordained.
The central bank raised its key rate by a quarter point on June 1 to 0.5 percent, becoming the first in the Group of Seven wealthy countries to do so, and markets are pricing in a second rate hike on July 20.
"The bank must balance the competing influences on Canadian activity and inflation of momentum in domestic demand and the increasingly uneven global recovery," Carney said in a speech in Charlottetown, Prince Edward Island.
"In light of the scale and volatility of these conflicting forces, it should be evident that no particular path for monetary policy is preordained."
Carney said the bank will need to be agile and take a subtle approach to monetary policy.
The central bank's next rate announcement is on July 20.
Yields on near-term overnight index swaps, which trade based on expectations for the Bank of Canada's key policy rate, showed markets see an 83.08 percent chance the bank will tighten rates further in July. This was down from 83.49 percent just before Carney's speech.
The Canadian dollar rose to its highest level since May 14 just after Carney's speech was released. It climbed to C$1.0224 to the U.S. dollar, or 97.81 U.S. cents, then pared gains to sit almost unchanged from Tuesday's close at C$1.0251, or 97.55 U.S. cents.
Canada's economy has recovered faster than predicted, fueled largely by consumer spending, and the bank expects it to be the fastest-growing G7 country over the next two years.
A cornerstone of the Canadian economic recovery had been a sturdy residential housing sector, but statistics earlier in the day showed the sector was cooling further. Sales of existing homes in Canada fell 9.5 percent in May from April, data showed.
Carney noted that the central bank's most recent forecast projected housing market activity would slow "markedly" for the balance of the year and that the latest resale numbers are consistent with that.
He also reiterated that growth would be handed off to the private sector as government stimulus winds down.
One of the key risks to the economic outlook lies externally as the Greek debt crisis and increasingly multi-speed global recovery could have spillover effects in Canada, Carney said.
"Canada is not an island ... The biggest risks we face are from abroad. Those are the biggest swings," he told reporters following his luncheon speech.
CARNEY TO G20: BE BOLD
To prevent the global recovery from derailing or creating crippling imbalances, Carney urged the G20 group of developing and advanced economies to commit to bold policy changes at their summit in Toronto this month.
"The fiscal challenges that face a number of advanced economies are addressable, but they are addressable with bold action and that was part of the point of the speech. That is very much part of the point of one of the core objectives for Canada at the G20 summit," Carney said.
The required changes include more flexible currencies and reforms to boost domestic demand in emerging economies like China, as well as reducing deficits and enhanced productivity and growth potential in advanced nations.
They must also follow through with their G20 pledge to reform the financial sector to avoid future meltdowns and to resist trade and financial protectionism, he said.
"These are all big decisions. How quickly and how effectively they are taken will influence activity and inflation in Canada and, therefore, the stance of monetary policy," he said.
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