Bank of Canada holds rates, signals extended pause

Tue Jan 18, 2011 2:07pm EST
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By Louise Egan and David Ljunggren

OTTAWA (Reuters) - The Bank of Canada held its key interest rate steady on Tuesday and signaled it may keep rates on hold for longer than markets had expected even though it nudged its economic growth forecasts higher.

The central bank held its overnight lending target at 1 percent for the third straight time after leading the Group of Seven advanced economies last year by raising rates three times between June and September.

"Any further reduction in monetary policy stimulus would need to be carefully considered," it said in a statement that repeated the language used in its two previous rate decisions.

Canada's economy snapped back to life in late 2009 after a shallow recession but the initial galloping pace of growth has since slowed to a crawl, leaving policymakers wary of withdrawing extraordinary stimulus measures too soon.

While nobody expected the bank to make another rate move as early as this month, some market players had bet on a more hawkish statement on rates to reflect the spillover effects of recently announced U.S. tax cuts and the U.S. Federal Reserve's bond-buying program.

The bank did upgrade its economic outlook slightly, but it didn't change its medium-term forecast for a balanced economy by the end of 2012.

It stressed that the high-flying Canadian dollar was hampering recovery in the export sector, the backbone of the Canadian economy, and that Europe's debt woes remain a black cloud over the global economy.

Many analysts think the bank is unlikely to push Canadian rates much above their U.S. equivalents because this could send the Canadian dollar to fresh multiyear highs. And Monday's government decision to curb high household debt by tightening mortgage rules for a second time in less than a year could also let the bank delay a fresh rate hike further.   Continued...