December 7, 2010 / 2:21 PM / 7 years ago

Bank of Canada holds rates, cites weaker growth

OTTAWA (Reuters) - The Bank of Canada held its key interest rate steady on Tuesday and set the stage for rates to stay unchanged into next year by emphasizing its concern over weaker exports and the risks posed by Europe’s debt woes.

The bank, as expected, maintained its overnight lending target at 1 percent for a second consecutive time. In June it had become the first central bank in the G7 advanced countries to raise borrowing costs following the recession, and subsequently raised rates twice more.

“Any further reduction in monetary policy stimulus would need to be carefully considered,” it said in a statement, repeating language used in its last decision in October.

The Canadian dollar softened to C$1.0041 to the U.S. dollar, or 99.59 U.S. cents, from about C$1.0027, or 99.73 U.S. cents, right before the announcement. It later recovered.

All 44 forecasters surveyed by Reuters last week had predicted no change in rates, but markets are divided on the timing of the first increase in 2011.

The bank’s overall tone was not much different from six weeks ago when it signaled it would need considerable persuasion that the global recovery was gaining traction before increasing rates again, analysts said.

It said the global and domestic recoveries were advancing, but it warned of an increased risk that Europe’s sovereign debt concerns could trigger financial market strains.

The bank also said the trade-reliant Canadian economy was recovering slightly more slowly than it projected in its quarterly outlook in October as the strong Canadian dollar hampered exports.

“There’s a lot of focus on risks and risks that have increased and sovereign debt is mentioned explicitly and that seems to be the trump card right now keeping the Bank of Canada from actually playing the tightening game,” said Eric Lascelles, chief Canada macro strategist at TD Securities.

“I think the market is left to conclude that rate hikes are probably not coming early in 2011 based on this statement,” he said.


Analysts in the Reuters poll predicted the first rate hike of 2011 would be in May, according to the median forecast. But Canada’s 12 primary dealers were more dovish on average, taking the view that the move would not come until July.

Markets were pricing in an 88.4 percent probability the bank would hold rates steady on January 19, the bank’s next policy announcement date, up slightly from 86.3 earlier in the session.

Canadian third-quarter growth fell below the bank’s expectations at an annualized 1 percent. But household spending was stronger than expected and business investment rebounded.

The bank appeared unfazed by October’s higher-than-expected inflation of 2.4 percent, which had prompted some analysts to predict a rate hike early next year rather than later. It said underlying price pressures remained unchanged.

“It seems like the major theme here is that they’re a little more dovish than they were here in October. Nothing radical by any means,” said Doug Porter, deputy chief economist at BMO Capital Markets.

The bank targets a 2 percent annual inflation rate, but tolerates a range of 1 to 3 percent.

Reporting by Louise Egan and David Ljunggren; editing by Peter Galloway

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