Bank of Canada drops rate-hike talk, sees slower growth

Wed Oct 23, 2013 3:00pm EDT
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By Louise Egan and Randall Palmer

OTTAWA (Reuters) - The Bank of Canada has abandoned 18 months of warnings that interest rates will one day have to rise, saying on Wednesday that a soft economy and persistently weak inflation mean there is as much chance of a rate cut as a rate hike.

The surprise policy shift, which knocked the Canadian dollar to a one-week low and sent bond prices higher, came in a statement in which the central bank kept its key rate at 1.0 percent and dropped any hint of an eventual rate increase.

The bank had been signaling since April 2012 that borrowing costs would have to rise. It was the only central bank in the Group of Seven major economies to take that stance.

It now forecasts that inflation, which has been below the bank's 2 percent target for the past year and a half, will take six months longer than it had anticipated to return to target. The bank now expects that to happen at the end of 2015.

The decision to remove the reference to rate increases comes after the U.S. Federal Reserve surprised markets in September by maintaining its stimulative bond-buying program due to concern about the U.S. economic outlook. The United States is by far Canada's biggest export market, and the Bank of Canada noted growth there has been slower than expected.

"Uncertain global and domestic economic conditions are delaying the pick-up in exports and business investment," Bank of Canada Governor Stephen Poloz told reporters. "This leaves the level of economic activity lower than the bank had been expecting."

Poloz added that the bank was more concerned than before about the risk of persistently low inflation. But he also said that that danger, which might encourage a rate cut, is balanced by the record-high levels of personal debt that Canadians have taken on in an era of ultra-low rates.

The governor, presiding over his third rate decision since taking the bank's helm in June, said the bank's next move would depend on how the economy performs.   Continued...

The Bank of Canada building is pictured in Ottawa March 3, 2009. REUTERS/Chris Wattie