18 Jan Carney keeps bank’s benchmark interest rate at 1%

The Bank of Canada elected to hold its benchmark overnight lending rate steady at one per cent in its latest policy decision on Tuesday.

“The global economic recovery is proceeding at a somewhat faster pace than the bank had anticipated, although risks remain elevated,” the bank said in a statement.

“Any further reduction in monetary policy stimulus would need to be carefully considered.”

The statement gave no clear indication as to when the bank might start raising rates again.

After cutting the rate to a record low of 0.25 per cent during the recession, the central bank raised the rate in June, July and September before standing pat in its three policy decisions since then.

Economists were expecting the bank to not change the rate — especially after the federal government moved to cool the housing market further on Monday by tinkering with mortgage rules.

However, the C.D. Howe policy council recommended last week that the time had come to start edging the rate toward meeting a target of 2.5 per cent by the end of the year.

BMO economist Michael Gregory predicted in a commentary released after the announcement that the bank would resume increasing rates in May.

With the Canadian dollar already strong, he said the bank “is going to want to see a persistent” improvement in the U.S. economy to avoid any American downturn that would push the loonie higher and make Canadian exports less competitive.

High dollar a worry

The bank signalled it is clearly worried about the Canadian dollar, which is trading over parity with the U.S. currency, and the low productivity of Canadian businesses.

“The cumulative effects of the persistent strength in the Canadian dollar and Canada’s poor relative productivity performance are restraining this recovery in net exports and contributing to a widening of Canada’s current account deficit to a 20-year high,” it said.

The bank projects the economy will expand by 2.4 per cent in 2011 and 2.8 per cent in 2012 — a slightly firmer profile than had been forecast in October.

Core inflation is projected to edge gradually up to two per cent by the end of 2012, as excess supply in the economy is slowly absorbed.

The bank did not change its target date for when it expects the economy to return to full capacity from the end of 2012.

As well, the bank continued to stress that risks to the global recovery remain “elevated” because of large government debt buildups, particularly in Europe, and the poor financial positions of international banks.

The bank will issue a new comprehensive outlook on the economy on Wednesday, when its intentions over interest rates might become clearer.

CBC newsTuesday, January 18, 2011