The Bank of Canada held its trend-setting Bank Rate at 1.25 per cent on May 31, 2011. This marks the sixth consecutive policy rate announcement for which interest rates have been kept on hold.
The Bank now sees headline inflation as staying above 3 per cent in the short term. It nonetheless maintained its inflation outlook included in its April Montary Policy Update, which indicated that inflation in Canada would hit two per cent by mid-2012.
“The Bank sets rates based on an inflation target of between one and three per cent, and it normally leans against inflation by raising interest rates. Leaving rates on hold in the face of higher inflation will likely become a communication challenge for the Bank,” said Gregory Klump, Chief Economist for The Canadian Real Estate Association. “While the Bank said currently low interest rates will be raised ‘eventually’, there was little to suggest that the Bank is in any rush to do so.”
The Bank’s decision to keep its policy interest rates on hold follows recent comments by Finance Minister Jim Flaherty that he’s “quite worried” about the outlook for the global economy. However, while global risks and their potential impact on the Canadian economic outlook remain elevated, the Bank has given itself plenty of room to justify raising interest rates.