Bank of Canada abandons neutral reference, holds rates steady

Wed Oct 22, 2014 10:34am EDT
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By Randall Palmer and Leah Schnurr

OTTAWA (Reuters) - The Bank of Canada dropped any reference to taking a neutral stance on interest rates on Wednesday after having already signaled that it would generally not give forward guidance on its rate moves.

The bank kept its key overnight rate at 1 percent, where it has been for more than four years, but this had been universally expected and markets were looking more for its overall outlook and analysis. In September it had said it was neutral on the timing and direction of rate changes.

Bank Governor Stephen Poloz said earlier this month he wanted to get out of the business of publicly predicting where rates would go, reserving forward guidance generally for when rates are at, or near, zero. He told Reuters at the time he did not know whether he would eliminate the neutral reference.

The bank did voice new concern on Wednesday about Canada's heated housing market and household debt but it said underlying inflationary pressures remained muted and the risks to its inflation projection were roughly balanced, falling within the zone for which the current interest rate is appropriate.

In July, the bank had said elevated household imbalances were evolving in a constructive way; this changed in September to saying risks associated with household imbalances had not diminished. On Wednesday, it went further: "The financial stability risks associated with household imbalances are edging higher."

"Housing activity has been more robust than anticipated, buoyed by continued very low mortgage rates and exhibiting strength beyond a rebound from weather-depressed levels earlier in the year," it said in the quarterly Monetary Policy Report that accompanied its rate statement.

The bank said that housing markets in Eastern Canada showed signs of a soft landing, but were generally robust and much tighter in major cities in Ontario, Alberta and British Columbia. "Household imbalances could increase further," it added.

"The ratio of household debt to disposable income is expected to edge higher from its current elevated level before stabilizing by 2016," the bank said.   Continued...

The Bank of Canada building is pictured in Ottawa June 1, 2010. REUTERS/Chris Wattie