Bank of Canada lending rate

Jeremy Torobin

Ottawa Globe and Mail Update Published on Tuesday, Apr. 20, 2010 9:10AM EDT Last updated on Tuesday, Apr. 20, 2010 11:44AM EDT

The Bank of Canada kept its benchmark lending rate at an historic low Tuesday, but removed a so-called conditional commitment to stay on hold through the middle of the year, signalling that it could raise interest rates as early as its next policy decision June 1.

In the statement accompanying Tuesday’s decision, Governor Mark Carney and his rate-setting panel said they expect the economy to return to full capacity in the second quarter of next year, rather than the third as previously forecast.

That shows the central bank believes that slack created by the country’s first recession since the early 1990s, and the sharpest global downturn since the Great Depression, is being absorbed more quickly than policy makers had predicted.

At the height of the global crisis in April, 2009, the central bank cut the benchmark overnight rate to the lowest it could go, 0.25 per cent, and pledged to keep it there until at least the middle of this year, depending on inflation. The removal of that pledge increased investor bets that the first rate hike will be on June 1, rather than July 20 or later, and sent the currency shooting through parity with the U.S. dollar because it now seems certain the Bank of Canada will act long before the U.S. Federal Reserve.

``A June rate hike is now likely,’’ said Doug Porter, deputy chief economist at the Bank of Montreal. ``This statement marks a dramatic change in tone by the Bank, and doesn’t rule out possible 50-basis-point moves.’’

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