Bank of Canada holds rate but says outlook improved

Thu Mar 8, 2012 9:03am EST
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OTTAWA (Reuters) - The Bank of Canada held its key interest rate unchanged on Thursday, as anticipated, but issued a more upbeat outlook for the Canadian and global economies that suggests it is starting to think about an eventual rate hike.

The central bank maintained its overnight lending rate target at 1 percent for the 12th straight time. It said the Canadian economic outlook was "marginally improved", uncertainty around the global economy had decreased and the profile for inflation was somewhat firmer than it had foreseen.

It also added a line about the dangers of high household debt levels in a sign of increasing worry about the consequences of ultra-low borrowing costs.

"Canadian household spending is expected to remain high relative to GDP (gross domestic product) as households add to their debt burden, which remains the biggest domestic risk," the bank said in a statement.

The bank repeated that there was "considerable monetary policy stimulus" in Canada but made no mention of the need to eventually withdraw that stimulus, language that it used in May and July of last year.

It tempered its more optimistic tone by noting that while it expected the economy to perform better in the first quarter than forecast, it would be due to temporary factors. Exports will contribute little to growth despite stronger U.S. demand because of persistent Canadian dollar strength and competitive challenges, it predicted. (Reporting by Louise Egan; Editing by Randall Palmer)