December 6, 2011 / 2:04 PM / 6 years ago

Bank of Canada holds rates, cites deeper euro crisis

4 Min Read

OTTAWA (Reuters) - The Bank of Canada kept its overnight interest rate at 1 percent on Tuesday, as expected, and gave no suggestion of an impending rate cut even though its view of the European debt crisis has clearly darkened.

The central bank extended a freeze on rates for a 15th straight month. While its statement sounded upbeat on near-term growth in Canada and the United States, it cautioned that both will feel the pinch from a "more pronounced" recession in Europe.

"Conditions in global financial markets have deteriorated as the sovereign debt crisis in Europe has deepened. Additional measures will be required to contain the European crisis," the central bank said starkly.

The bank now sees Europe's economy shrinking more sharply than it previously expected, which could be felt in Canada through financial, confidence and trade channels.

Six weeks ago, when it released quarterly forecasts, the bank had assumed the European crisis would be contained, although central bank chief Mark Carney in late November characterized it as "barely contained."

But the bank's statement was relatively balanced compared to the gloom markets had been expecting, and it poured cold water on the idea of imminent monetary easing.

The Canadian dollar strengthened to C$1.0113 to the U.S. dollar, or 98.88 U.S. cents, from around C$1.0200 immediately before the announcement.

The interest rate futures market showed traders reduced bets on a rate decrease in the coming year.

"In a sense you see that there's a somewhat better tone and what's important is that this better economic tone is also coming from our most important trading partner," said Stefane Marion, chief economist at National Bank Financial in Montreal.

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Graphic on Canadian rates: link.reuters.com/puq45s

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The bank said U.S. growth had been slightly more robust than forecast although European and other factors would weigh. Growth in China and other emerging markets remained strong, although it seems to be moderating, it added.

The better tone in Canada was reflected in Ivey Purchasing Managers Index data released on Tuesday. The seasonally adjusted index rose to a higher-than-expected 59.9 in November from 54.4 in October, suggesting resilience to the global economic turmoil.

Building permits in October also unexpectedly jumped by 11.9 percent, a possible precursor to strong construction activity in upcoming quarters.

On balance, the bank repeated, Canadian growth in the second half should be slightly stronger than predicted, with household and business spending strong.

"Going forward, the weaker external outlook is expected to dampen GDP growth in Canada," it added. "The economy also continues to face competitiveness challenges, including the persistent strength of the Canadian dollar."

The central bank gave no clues about future rate moves, using language identical to its October 25 statement.

"The general expectation is that they'd turn the screw another notch in terms of dovishness, and I don't think it's obvious that they did that," said Doug Porter, deputy chief economist at BMO Capital Markets.

"Overall, I don't really sense much of a change at all in the bank's overall view."

The bank continues to expect total and core inflation to ease as the output gap persists well into 2013.

Forecasters in a Reuters poll in late November predicted the central bank's next move would be a rate increase, but not until the fourth quarter of next year..

By contrast, the interest rate futures market has been pricing in a probable rate cut some time next year.

The yield on the two-year Canadian government bond, which is especially sensitive to Bank of Canada interest rate moves, rose to 0.904 percent from 0.868 percent just before the announcement.

Additional reporting by Claire Sibonney, Jennifer Kwan and Allison Martell; editing by Janet Guttsman and Jeffrey Hodgson

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