CREA news: Bank of Canada maintains interest rates - Reiterates commitment to hold until end of second quarter of 2010

CREA 12/08/2009 - As was widely expected, the Bank of Canada held its benchmark overnight lending rate steady at 0.25 per cent at its setting on December 8th, 2009. The trend-setting Bank rate, which is set 0.25 percentage points above the overnight lending rate, remains at 0.5 per cent.

The Bank acknowledged that global economic developments have been slightly more positive, and that the global outlook had improved modestly since its October announcement, but noted “significant fragilities remain.”

As the Bank predicted in October, recent growth in Canada has been coming more from the domestic side and less from exports, the result of the persistent strength in the Canadian dollar. On balance, this shift resulted in weaker than expected growth in the third quarter.

The Bank noted that the risks to the inflation outlook remain unchanged from those outlined in the October Monetary Policy Report. Inflation could climb faster if global and domestic demand ends up being stronger than currently expected. By contrast, inflationary pressures would be held in check by a more protracted global recovery and persistent strength in the Canadian dollar.

While the Bank said it judged these risks to be roughly balanced, it noted that, since it cannot lower rates any further, the overall risk to the projection are tilted slightly to the downside.

The Bank said that the profile for the recovery in Canada was still consistent with its October Monetary Policy Report, saying inflation would return to the 2 per cent target by the second half of 2011. However, in its October announcement, the Bank had said inflation was projected to get back to 2 per cent by the third quarter of 2011.

This subtle change hints at the possibility that the Bank could leave rates unchanged even longer than expected, and may be intended to quiet speculation that the Bank would hike rates before its repeated pledge of July 2010 at the earliest. The Bank’s commitment to keep interest rates on hold until the second half of next year is conditional on the outlook for inflation.

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Marlene Ofter

Marlene Ofter

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CENTURY 21 Max-Immo
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