Bank of Canada keeps interest rates on hold

The Bank of Canada kept its key policy rate at 1 per cent on December 4th 2012. It has been unchanged at this level for more than two years, marking the longest period since the early 1950s that rates have been left untouched.

The text accompanying the announcement was little changed from the previous three statements. This includes the bottom line that the Bank would still like its next move to be a rate hike, saying some modest withdrawal of current stimulus will “likely” be required “over time”, but that the “timing and degree of any such withdrawal will be weighed carefully against global and domestic developments, including the evolution of imbalances in the household sector.”

The Bank said that while the economic expansion in the United States was still progressing at a gradual pace, it was being held back by uncertainty related to the outcome of fiscal cliff negotiations. And while Europe remains in recession, Chinese growth appears to be stabilizing, lessening fears of a hard landing. That said, the global economy remains vulnerable to a major shock from the U.S. or Europe.

Third quarter economic growth in Canada was weak, although the Bank attributed this to “transitory disruptions in the energy sector,” saying it still expects growth to pick up going forward.

Spurred on by the continuation of near-record low interest rates, consumption and business investment still are expected to be the primary drivers of economic growth in Canada next year. The Bank noted that housing activity has declined and that growth in household credit has slowed, but cautioned that it was too early to tell if this trend would be sustained.

Regarding consumer price inflation, the Bank said it has evolved broadly in line with their forecast, with both total and core inflation expected to rise and return to the 2 per cent target in the next year.

The bottom line is that economic growth is expected to remain modest but positive, consistent with low inflation and low interest rates. The Bank of Canada has repeatedly said it would like to raise rates, although the prevailing economic outlook suggests such an action will not be warranted until late next year at the earliest, and that outlook may well be revised by the time the Bank makes it next announcement on January 23rd, 2013, by which time the outcome of the U.S. fiscal cliff will be known.

As of December 4th, 2012 the advertised five-year lending rate stood at 5.24 per cent. It has been unchanged at this level since the beginning of June.

(CREA 12/4/2012)

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