Bank of Canada sees low rates during ho-hum recovery

Tue Jan 11, 2011 5:01pm EST
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By Louise Egan

KINGSTON, Ontario (Reuters) - Low inflation and weak growth mean Canadian interest rates must remain low for now, while households must be wary of taking on too much debt, a senior Bank of Canada official said on Tuesday.

In comments after her first speech since becoming one of the central bank's deputy governors in July last year, Agathe Cote said Canadian business investment remained lower than the bank might have expected for this stage in the economic recovery.

"I think the view is that there is still a significant amount of excess supply in the economy so monetary policy needs to be, in a sense, still accommodative in these circumstances," she said in response to a question from the audience.

The Canadian economy rebounded sharply from a shallow recession in 2009. But growth began to slow in the latter half of 2010, reflecting both a still fragile U.S. economy and three Canadian interest rate hikes between June and September.

The Bank of Canada has left rates steady since then, pending more evidence that exports and business investment are on solid footing.

"We are seeing increased (import) penetration in Canada. These are good signs in the sense that, clearly there are issues with Canadian competitiveness, and one way of improving it is to get on with investment," Cote said.

"We have seen some encouraging signs in the last year in terms of inflation picking up, but it (investment) is still very low for this stage of the recovery compared to what we had in previous cycles," she added.

Inflation remains under control, she said.   Continued...