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

Wed Oct 23, 2013 11:44am EDT
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By Louise Egan and Randall Palmer

OTTAWA (Reuters) - The Bank of Canada abandoned on Wednesday 18 months of warnings that interest rates will one day have to rise in a sharp policy shift that highlighted weaker-than-expected growth and inflation and pushed the prospect of higher rates further into the future.

The bank's surprise move knocked the Canadian dollar to a one-week low and sent bond prices higher as traders scaled back bets on a rate increase late next year.

The central bank held its key interest rate at 1.0 percent, its level for more than three years.

But for the first time since April 2012, when the Bank of Canada became the first in the Group of Seven rich nations to introduce a rate-hike bias, it dropped any mention of eventual rate increases, or in the words it used in September, a "gradual normalization" of rates.

Inflation has been below the bank's 2 percent target for the past year and a half, and that means that "downside risks to inflation assume increasing importance," the bank said in its third rate decision under its new governor, Stephen Poloz.

"However, the bank must also take into consideration the risk of exacerbating already-elevated household imbalances," it said, a reference to the soaring debt load of Canadian households.

"Weighing these considerations, the bank judges that the substantial monetary policy stimulus currently in place remains appropriate and therefore has decided to maintain the target for the overnight rate at 1 percent."

The Canadian dollar weakened after the news to C$1.0374 versus the U.S. dollar, or 96.39 U.S. cents, weaker than Tuesday's close of C$1.0289, or 97.19 U.S. cents.   Continued...

The Bank of Canada building is pictured in Ottawa July 19, 2011. The Bank of Canada held its key interest rate steady on Tuesday as expected but hinted more strongly than before that it would resume hiking soon as the sturdy domestic economy grows closer to full capacity. REUTERS/Chris Wattie