Bank of Canada May Stop Rate Increases, Fidelity's Prothro Says
Last Updated: August 10, 2007 10:51 EDT

Aug. 10 (Bloomberg) -- The Bank of Canada may not raise interest rates next month as the U.S. subprime mortgage crisis diminishes global growth prospects, according to David Prothro, a fund manager at Fidelity Management and Research, the world's biggest mutual fund company.

``When the state of the capital markets is in flux, and the availability of credit to consumers and borrowers is being tightened significantly, it may give the Bank of Canada a possibility to pause after one rate move,'' said Prothro, who manages C$6 billion in Canadian fixed-income funds, including the Fidelity Canadian Bond Fund, in an interview from Merrimack, New Hampshire.

The Bank of Canada on July 10 raised its benchmark lending rate a quarter-percentage point to 4.5 percent to cool the economy and stem inflation and said ``modest'' further increases may still be needed. Policy makers next meet Sept. 5

Investors reduced bets on interest rate increases by the Bank of Canada after a credit crunch forced central banks to provide emergency cash. The September bankers' acceptances futures contract yielded 4.65 percent, down from 4.83 percent on Aug. 8.

``Fundamentally, Canada is a much different place than the U.S. It's hard to envision Canada's fundamentals being better than they are right now,'' Prothro said. ``But the second hike isn't a foregone conclusion because the wild card is the U.S. economy.'' Canada sends more than 80 percent of its exports to the U.S.

Credit Quality

Prothro said the credit quality of Canadian companies and financial institutions was ``very good'', and there was a little chance that mortgage defaults will spread to Canada. ``The real impact for Canada is that we'll see spreads widening,'' between the government and corporate debt.

Central banks are globally attempting to fend off a global credit crunch by adding liquidity to their systems as losses from subprime mortgages spread.

The Bank of Canada injected C$825 million ($781 million) into financial markets today. Yesterday, it put C$1.64 billion into markets through one-day purchases of government securities.