Bank of Canada keeps interest rate at 1%


_h366_w650_m6_otrue_lfalseSukhjeevan Sharma,

OTTAWA The cost of lines of credit and variable-rate mortgages are not expected to change any time soon as the Bank of Canada held its key interest rate steady at one per cent on Wednesday.In a largely status-quo statement, the central bank indicated it does not foresee enough of a change in Canada’s economic fortunes to adjust the rate from the same level it has held for the last four years.”Overall, the risks to the outlook for inflation remain roughly balanced, while the risks associated with household imbalances have not diminished,” the bank said.

Economists, who had widely expected no change to the overnight rate, found Wednesday’s statement to be less gloomy — although not necessarily more optimistic — than the bank’s last release in July.”We just think the message was a little less downbeat than in the summer,” said Doug Porter, chief economist with BMO Capital Markets.”I would characterize it as moving close to neutral. I mean, they’ve always said they were in neutral … but you often had the impression that it was neutral with a big ‘but’ — but we’re worried about the downside.”

Gone in this statement are past references to “serial disappointment” with the economy’s performance, a “soft landing” for housing and that closing the output gap “hinges critically” on stronger exports and business investment.Those omissions could be read as the central bank striking a slightly more upbeat tone this time around.”It was almost more what they didn’t say rather than what they did say,” Porter said.Both at home and abroad, the bank says the economy is performing largely as expected.In Canada, inflation continues to hover around two per cent, which the central bank said is just as it expected back in July when it released its last monetary policy report.

“Recent data reinforce the bank’s view that the earlier pickup in inflation was attributable to the temporary effects of higher energy prices, exchange rate pass-through, and other sector-specific factors rather than to any change in domestic economic fundamentals,” it said.But while the risks for inflation remain, in its words, “balanced,” the central bank said the risks associated with household debt have not gone away.The target date for the economy to return to full capacity is still within the next two years, it added.”Overall, the key message is that the next move in rates could still be up or down, largely because it is seen as distant enough to be uncertain in either timing or direction,” said Avery Shenfeld, chief economist at CIBC World Markets.

Wednesday’s statement also noted that while Canada’s exports seem to be picking up, that growth needs to continue before companies increase their investment and hiring.”While an increasing number of export sectors appear to be turning the corner toward recovery, this pickup will need to be sustained before it will translate into higher business investment and hiring,” it said.The central bank also noted activity in the housing market is stronger than previously thought.

The bank says there were no big surprises on the global front. Europe’s recovery seems to be “faltering,” it says, while the United States is still on the comeback trail, thanks in part to stronger business investment.”Global financial conditions remain very stimulative and longer-term bond yields have eased even further,” the central bank said.

The Bank of Canada’s next rate announcement is set for Oct. 22 when it is also expected to publish an update to its monetary policy report.


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