Source: The Canadian Press

The Bank of Canada is being urged to hold the line on interest rates Tuesday as economists warn that another hike in borrowing costs could push the loonie higher, hurting exporters, and could also make it more costly for Canadians mired in rising debtloads.

“We believe the BoC will keep rates unchanged until next spring, although officials will not acknowledge this publicly,” the Moodys bond rating agency said in a report Monday.

“Since the summer, Canada’s domestic recovery has hit some speed bumps, inflation has been soft, and the unemployment rate has been stuck near 8%,” wrote Moodys economist Jimmy Jean.

“The U.S. picture has meanwhile grown more worrisome, with private sector hiring not strong enough to dent its near 10% unemployment rate.”

Other economists also expect the central bank’s governor, Mark Carney, to take a break from three straight increases to the key lending rate, which affects mortgage and other short-term borrowing rates.

Shrinking inflation and consumer confidence levels, as well as downbeat employment data from September and a rising loonie all provide incentive to leave the bank’s policy rate at 1% when the Bank of Canada makes its next interest rate announcement on Tuesday.

On the other hand, Canadians encouraged by historically low interest rates continue to borrow heavily, sending debt loads to a record 146% of income. Some economists say a rate hike would help curb overborrowing and help prevent a future crisis.

Carney has been particularly stark in his warnings about consumer debt and is expected to take the cautious route on further increases.

At a speech in Windsor, Ont., last month, he warned that Canada’s economic recovery has relied heavily on unsustainable levels of demand for housing and personal goods.

While consumers are weighed down with record debt, income growth will be modest and house values won’t rise enough to boost household wealth, he said.

Future months will see the rate of growth slowing to a modest pace as the economy comes under pressure from low demand for Canadian exports — mainly from the United States — and the “limits of household balance sheets,” he added.

The Bank of Canada began raising borrowing costs in June to fight inflationary pressures in the economy, following a 14-month period of falling rates.

Since June, there have been three increases of one-quarter point as the central bank reduces the amount of monetary stimulus in the system. Meanwhile, inflation is expected to continue to hover at a benign 2%.

Douglas Porter, deputy chief economist at the Bank of Montreal, said holding interest rates at 1% would be wise, given the weakness of economic data since Carney’s last interest rate announcement in September.

“Almost from the day the bank raised rates and sounded hawkish on Sept. 8, there was suddenly a stream of downbeat data in Canada, which was finally broken last week” by an improvement in the country’s trade balance, he said in a note Monday.

The latest jobs data from Statistics Canada found there were 6,600 fewer Canadians working in September, and the jobless rate stood at 8%.

Porter added that it looks like Canada’s gross domestic product growth in the third quarter will be around 1.5% — at least a percentage point lower than the bank’s latest forecast.

The rise of the loonie — which briefly hit parity last week — is expected to put further pressure on Carney to freeze interest rates.

The increasing likelihood that the Federal Reserve will increase the U.S. money supply has sent the loonie soaring toward parity with the greenback, Porter said.

“In this environment, we and the market consensus believe that the bank is highly unlikely to raise rates Tuesday, or any time soon for that matter.”