Bank of Canada holds rates steady, tweaks outlook

Tue Jan 19, 2010 11:50am EST
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By Louise Egan

OTTAWA (Reuters) - The Bank of Canada held its key interest rate at a record low on Tuesday, as expected, and changed growth forecasts only slightly, highlighting weak U.S. demand and a strong Canadian dollar as risks to the recovery.

The central bank kept its overnight lending rate at 0.25 percent and repeated its commitment to hold it there until the end of the second quarter, provided inflation remains tame.

While sounding marginally more upbeat on the global economic outlook and noting stronger-than-expected inflation in Canada, the bank balanced those views by cautioning about the "considerable" slack in the economy and the lack of private sector stimulus so far in the recovery.

Overall, the bank upheld the status quo on rates and gave no indication of when it might start tightening.

"They're clearly on hold until at least the third quarter and they see the risk being quite balanced with the strength of the Canadian dollar being a core risk as well as the global growth outlook from here," said Camilla Sutton, currency strategist at Scotia Capital.

The bank nudged down its growth outlook for this year to 2.9 percent from 3.0 percent but sees 2011 growth of 3.5 percent compared with 3.3 percent previously. It believes the economy contracted 2.5 percent in 2009 versus its previous forecast of a 2.4 percent decline.

"Both 2009 and 2010 have been reduced by a tenth and 2011 has been bumped by two tenths so...basically there's a very little net change in terms of the growth forecast," said Doug Porter, deputy chief economist at BMO Capital Markets.

The bank said policy support continued to motor Canadian growth along with increased confidence, improved financial conditions, global growth and better export prices.   Continued...

<p>The Bank of Canada building is pictured in Ottawa July 30, 2009. REUTERS/Chris Wattie</p>