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 **

CBC News

Bank of Canada governor Mark Carney signalled Thursday a slowing of the bank’s recent effort to tighten monetary policy.

In a speech in Windsor, Ont., Carney said that given the risks of a renewed U.S. slowdown and amid slow consumption and housing activity in Canada, “any further reduction in monetary policy stimulus would need to be carefully considered.

“The unusual uncertainty surrounding the outlook warrants caution.”

Carney’s remarks came the same day new data showed Canada’s gross domestic product shrank by 0.1 per cent in July, the first time it has contracted in 11 months.

The Bank of Canada has raised interest rates — described as tightening monetary policy — three times in the past four months, most recently on Sept. 8. The bank’s key overnight lending rate is currently 1.0 per cent.

Carney pointed out that during the same time in the United States, the Federal Reserve has held the policy rate at almost zero.

“While Canada’s circumstances and the discipline of the inflation target dictate a different stance than in the United States, there are limits to this divergence,” he said.

The recession may be over, he warned, but it’ll still a long road back to a strong economy.

Domestically, Canada’s relatively strong bounce-back from recession has been supported by housing expansion and personal consumption, two factors that can’t continue, Carney said.

Externally, he said, the world is facing a restructuring that could take 10 years and subdue growth in the advanced economies.

Even Canada’s supposedly strong jobs recovery is not as shining as it looks, he said.

The unemployment rate remains high at 8.1 per cent and many of the jobs created since July have come in the public service and what he called involuntary part-time work.

GDP decline predicted

The decline in the gross domestic product, which was announced Thursday, was in line with what economists were expecting, as the economy has been showing signs of a slowdown since the early stages of the government stimulus-led recovery in late 2009.

“The Canadian economy has lost much of its forward momentum, reflecting sluggish U.S. demand for the stuff we make and the payback for having home renovation activity and home sales pulled forward earlier in the year,” BMO economist Michael Gregory noted.

The Bank of Canada is expecting two per cent growth for the July-to-September period as a whole, but the central bank is set to update those forecasts at its next policy meeting on Oct. 21.

Speaking at an event in Ottawa, Finance Minister Jim Flaherty said he was neither surprised nor overly concerned by the negative showing.

“The month of July had a very small negative showing,” he said. “From time to time, there will be ups and downs in any economic recovery.”

He blamed the decline, in part, on the impact of the HST in Ontario, B.C. and to a lesser extent Nova Scotia. He also said Ottawa is confident the third quarter will show growth overall.

“We’ve always said the recovery is fragile,” Carney said.

Manufacturing, retail and wholesale trade, construction and forestry all posted decreases.

“Consistent with faltering domestic demand and weak U.S. demand, manufacturing shipments fell the hardest in the month,” TD Bank economist Diana Petramala wrote in a note to clients.

Increases were recorded in the mining sector and, to a lesser extent, in some financial industries and the public sector.

“Although the GDP result comes as no surprise, that doesn’t make it feel any better,” Gregory noted.

CBC News
The Bank of Canada boosted its key interest rate by one-quarter of a percentage point Wednesday, pushing the target for the overnight rate to one per cent.

The country’s central bank said the Canadian economic recovery has been uneven so far. But improved personal and corporate spending in the previous quarters and into the future was enough to justify an increase now to the central bank’s key lending rate.

“Going forward, consumption growth is expected to remain solid and business investment to rise strongly,” the bank said in a news release.

Markets reacted positively to the bank’s move in the morning session.

The Toronto Stock Exchange opened Wednesday up 35 points, reaching 12,137. Stocks on Canada’s major exchange then retreated to 12,118 by noon, still a gain of 16 points.

The Canadian dollar gained in value as well, up more than a cent from Tuesday’s close, at 96.55 cents US.

Rate breather

Wednesday’s rate increase could be the last one Canadians will see for some time, the Bank of Canada indicated. That is because the gross domestic product has grown a little more slowly than the bank originally anticipated, and inflationary expectations are broadly in line with forcasts.

Canada’s GDP grew by two per cent in the second quarter of 2010, down significantly from the 5.8 per cent clip in the January-to-March period.

The central bank said it will take a wait-and-see attitude towards further increases.

“Any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook,” the bank said.

Analysts weigh in

Some economists now figure the bank will stay on the monetary sidelines for at least the next six months.

“The odds favour the Bank of Canada pausing for sometime,” TD Economics said. “And [we] do not anticipate another tightening before March of next year.”

Other stock experts agree.

“The Bank of Canada did signal that they are cautious, given the weak U.S. economic situation,” said Kate Warne, Canadian market strategist at Edward Jones, in St. Louis, Mo. “Therefore I would expect that they are likely to stay on hold until there is more clarity about how strong global growth is.”

Still other bank watchers, are not as convinced the Bank of Canada will stay inactive on the interest rate front.

“While we had been expecting the Bank to move to the sidelines for a spell, it appears it will take a deeper slowdown in domestic spending … to prompt them to stop raising rates,” said Doug Porter , an economist with BMO Economics.

In the mortgage market, however, other financial factors affect whether those rates will raise in response to the bank’s move.

“We’re seeing two forces at work here,” said Bill Maurin, chief financial officer of Meridian Credit Union, based in central and southern Ontario. “One is the [Bank of Canada] trying to slowly raise interest rates to curb inflation. Second, you have a lot of investment going into the bond market. This is pushing up the demand and prices of bonds and adding to the pressure on interest rates.”