Bank of Canada holds rate, says past cuts still helping

By Randall Palmer and Leah Schnurr

The Bank of Canada kept its key interest rate at 0.5 percent on Wednesday, declaring its previous two rate cuts were still stimulating an economy that is benefiting from solid household spending and a firm U.S. recovery.

It posted the important caveat that increasing uncertainty about growth prospects in China and other emerging markets were raising questions about the pace of global recovery.

The bank added that Canada’s resource sector continued “to adjust to lower prices for oil and other commodities, with some spillover to the rest of the economy” – adjustments it said were complex and would take considerable time.

However, weakness in the Canadian dollar is helping absorb some of the impact of lower commodity prices and facilitating economic adjustments, it noted. “While the overall export picture is still uncertain, the latest data confirm that exchange rate-sensitive exports are regaining momentum,” it said.

It made no direct reference to Canada’s hot housing market or to the high levels of household debt, saying only that “risks to financial stability are evolving as expected.” In July the bank had said vulnerabilities associated with household imbalances remained elevated and could edge higher.

The central bank had cut its target for the overnight rate by one-quarter percentage point in January and again in July because of the sharp oil price drop, which was causing serious reductions in business investment, especially in the oil patch.

“The stimulative effects of previous monetary policy actions are working their way through the Canadian economy,” it stated on Wednesday.

The market had expected the bank to stay on hold, particularly after Statistics Canada had reported substantial economic growth in June ending five months of contractions, as well as solid job growth and two months of strong trade data.

The bank said the dynamics of economic growth outlined in July remained intact. It said core inflation has been close to the 2 percent target, with disinflationary pressures from economic slack being offset by transitory effects of past currency weakening and some sector-specific factors.

Summarizing its analysis, the central bank said: “Taking all of these developments into consideration, the Bank judges that the risks to the outlook for inflation remain within the zone for which the current stance of monetary policy is appropriate.”

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