Bank of Canada Holds Key Interest Rate

Date: Tuesday, January 18th, 2011

By Courtney Tower

OTTAWA (MNI) – The Bank of Canada held its policy interest rate at 1.0% Tuesday, as expected, and continued to caution against expecting new rate increases in the future.

The Bank in its fixed-date announcement maintained the 1.0% overnight rate, set last October after three successive 0.25% rate hikes from the year-long rock-bottom rate of 0.25%.

The Bank was slightly more positive about United States, European, global and Canadian economic performances than it had been in its monetary policy report last October, but just slightly.

Global economic recovery is moving ahead “somewhat faster” than the Bank had anticipated, but risks “remain elevated,” the Bank said in a brief statement giving the stand pat decision.

Private demand has picked up in the United States and will be reinforced by the new stimulus package reached by President Barack Obama and Congress, it said. European growth has been slightly stronger than expected, but will be restrained by sovereign debt and deficit concerns.

Some overheated emerging markets are tightening policy measures, which may reduce the demand for and prices of commodities, the Bank said. Commodities have been a strong factor in Canada’s export performance.

The Bank listed a string of long-known Canadian economic factors behind the present modest growth. These include: government stimulus spending winding down this year and “stretched household balance sheets” restraining consumer spending and residential investment. On the other hand, business investment “will likely continue to rebound strongly,” and better U.S. growth and global demand for commodities will help net exports.

Net exports, however, are being held back by the persistently high Canadian dollar and “Canada’s poor relative productivity performance.”

Given all this, the BOC said, the Canadian economy will grow by 2.4% in 2011 and 2.8% in 2012, a very slight increase on the 2.3% in 2011 and 2.6% in 2012 that the Bank had predicted in October.

Inflation will continue to be of little concern, with inflation pressures remaining “subdued,” the Bank said.

Overall, then, the Bank decided to leave “considerable monetary stimulus in place,” at the 1.0% rate, and to believe that inflation will remain well anchored because of the “significant excess supply” remaining.

And the Bank repeated the caution it has now extended since October: “Any further reduction in monetary policy stimulus would need to be carefully considered.”

The next scheduled Bank of Canada meeting is March 1st 2011

Lawrence Kobescak

Lawrence Kobescak

Lawrence Kobescak, the creator behind OntarioMortgageSuperstore.com is a real estate sales representative, mortgage agent and real estate investor. OntarioMortgageSuperstore.com has reached over 240,000 Canadians since 2009. Lawrence has been quoted in the Globe & Mail and MortgageBrokerNews.ca.

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