Bank of Canada holds rates

Tue Oct 25, 2011 2:29pm EDT
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By Louise Egan and Randall Palmer

OTTAWA (Reuters) - The Bank of Canada took the prospect of interest rate hikes off the table on Tuesday with downgraded forecasts that showed some of the gloss coming off an economic recovery touted as the strongest in the G7.

The central bank held its key interest rate steady at an ultra-low 1 percent, as expected, but said the European debt crisis and weakness in its top trade partner, the United States meant the outlook for the Canadian economy had weakened.

It omitted language used in every rate announcement since May on the need to withdraw monetary stimulus, saying simply "there is considerable monetary policy stimulus in place."

The change in outlook was "pretty powerful" and suggests the bank will be on hold for a very long time, said Michael Gregory, senior economist at BMO Capital Markets.

"A lot of talk about the global economy, in fact if I'm just adding up the words here, more talk about the global economy than the domestic economy, which itself perhaps sums up where the net risks to Canada really lie," he said.

The dovish tone means investors have increased the chance of a rate cut in the coming year, although the bank made no suggestion of easing. The Canadian dollar hit a session low.

Bank of Canada Governor Mark Carney said earlier this month the bank won't be "trigger happy," but has room to cut rates if needed.

A weaker global economy, including a likely brief recession in the euro area, prompted the bank to cut its Canadian growth forecasts to 2.1 percent from 2.8 percent for this year and to 1.9 percent from 2.6 percent for 2012.   Continued...

<p>A woman walks past the Bank of Canada building in Ottawa September 7, 2011. REUTERS/Chris Wattie</p>