Bank of Canada unexpectedly holds rates on inflation

Tue Jun 10, 2008 1:10pm EDT
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OTTAWA (Reuters) - The Bank of Canada surprised the markets on Tuesday by holding its key interest rate steady at 3 percent and signaling an end to its rate-cutting cycle because of the threat of higher inflation.

Taking his cue from the U.S. Federal Reserve and the European Central Bank, Governor Mark Carney adopted a more hawkish tone and said price hikes now outweighed weak economic growth as the top risk to the economy.

Primary dealers had unanimously expected a quarter-point rate cut, and the BoC's unexpected decision brought to an abrupt end five months of policy easing which had lopped a collective 150 basis points off the overnight rate.

The Canadian dollar immediately shot up to around C$1.0222 to the U.S. dollar, or 97.83 U.S. cents, from C$1.0306, or 97.03 U.S. cents, just before the announcement.

"The bank now judges that the current stance of monetary policy is appropriately accommodative to bring aggregate demand and supply into balance and to achieve the 2 percent inflation target," the central bank said in a statement.

Economists said the BoC's decision reflected a concerted shift by developed countries, spooked by a sudden spike in oil prices, toward fighting inflation rather than worrying about stimulating economies battered by the global credit crisis.

"The new issue facing central banks, not just in Canada, but around the world is reflation," said Jeff Rubin, chief economist at CIBC World Markets.

In April, the bank had signaled another rate cut was in the pipeline but was vague on its timing. On Tuesday, it made no such reference.

"This is as close to a pause with the bias on the inflation tilting upward, that we now have to entertain the thought of the next story, which is the rate hike story," said Stewart Hall, markets strategist at HSBC Canada.   Continued...