Bank of Canada: Maintains Key Interest Rate

Date: Wednesday, October 20th, 2010

By Courtney Tower

OTTAWA (MNI) – The Bank of Canada suspended a series of increases in its key policy rate Tuesday, maintaining it at 1.0% and citing further slowdown and risk in the global and North American economies.

The Bank stopped at 1.0% for its overnight rate after three successive 25 basis point increases from a year-long record low of 0.25%, and gave no hint of when rate hikes might resume. The Bank repeated what it said the last time, on September 8: “any further reduction in monetary policy stimulus would need to be carefully considered.”

The Bank in its fixed date rate announcement gave a litany of negative events and conditions for its reason to leave “considerable monetary stimulus in place.” They include:

** Slower than expected global growth, in both advanced and emerging-market economies;

** “Weaker-than-projected recovery in the United States in particular” ;

** Currency market tensions and risks from global imbalances could cause a longer and more difficult recovery;

** Canadian growth will be more gradual than expected, on slower global recovery and less household spending.

The Bank announcement said the replenishing of inventories and the pent-up demand from the recession, that supported growth in 2010, “have largely run their course” in the world. Fiscal stimulus is shifting to reducing deficits.

As a result, continuing unemployment and continuing spending reductions is expected to slow growth in advanced economies more than had been expected. In emerging-market economies, growth would “ease to a more sustainable pace.”

“Heightened tensions in currency markets and related risks associated with global imbalances would result in a more protracted and difficult global recovery,” the Bank said.

“The economic outlook for Canada has changed,” the Bank said. Economic recovery would be more gradual than projected last July. Growth now is projected at 3.0% in 2010, 2.3% in 2011, and 2.6% in 2012 — against July predictions of 3.5%, 2.9% and 2.2% respectively.

More modest Canadian growth would come from a slower global recovery and lower domestic household spending, the Bank said. The Bank mentioned concerns expressed recently by Governor Mark Carney, that household debt is rising markedly in Canada.

Net exports, on which Canada’s economy is heavily dependent, and which have suffered severely during the recession and its aftermath, “will be sensitive to currency movements, the expected recovery in productivity growth, and the prospects for external demand,” the Bank said.

Inflation expectations have been revised downward. Total CPI, now running at 1.7%, and core inflation, now at 1.6%, “are expected to converage to 2% by the end of 2012.” Inflation expectations “remain well anchored.”

Given all of the conditions mentioned, “any further reduction in monetary policy stimulus would need to be carefully considered,” the Bank said in a repeat of what it said last September 8.

** Market News International Ottawa **

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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