Canada Keeps Key Lending Rate 1% With Neutral Bias

Bank of Canada Governor Stephen Poloz remained neutral on the direction of his next interest-rate move, saying he will look through a quickening of inflation this year with companies still slow to invest.

Policy makers held their benchmark rate on overnight loans between commercial banks at 1 percent, where it’s been since September 2010, as expected by all 18 economists in a Bloomberg News survey.

“The Bank continues to see a gradual strengthening in the fundamental drivers of growth and inflation in Canada,” policy makers led by Poloz, 58, said in a statement from Ottawa today. “The timing and direction of the next change to the policy rate will depend on how new information influences the balance of risks,” the bank said, a phrase that echoed the previous decision.

The economy’s recovery “hinges critically” on a shift in demand from indebted consumers to exports and business investment, which will be aided by a weaker Canadian dollar and rising U.S. orders, the bank said today. The International Monetary Fund said last week Canada should maintain loose monetary policy because there have been little signs of increased exports and business spending.

While energy costs are rising and a weaker currency is boosting prices of imported goods, policy makers are focusing on the “subdued” rate of core inflation that excludes volatile items, the bank said.

The bank moved up its projection of when total inflation will return to its 2 percent target to the first quarter of 2015 from the last three months of next year. The core inflation rate won’t reach 2 percent until the start of 2016.

‘Downside Risks’

“With underlying inflation expected to remain below target for some time, the downside risks to inflation remain important,” the bank said, echoing another phrase from its last decision.

Inflation has been below the Bank of Canada’s 2 percent target for 22 straight months, registering 1.1 percent on an annualized basis in February.

Poloz and Senior Deputy Governor Tiff Macklem will hold a press conference at 10:30 a.m. in Toronto.

Gross domestic product will expand 2.3 percent this year, the bank said, down from a January forecast of 2.5 percent, on a reduced contribution by business investment. The 2015 growth outlook remained at 2.5 percent, and today’s Monetary Policy Report gave the first estimate of 2016 growth at 2.2 percent. The economy will reach its full capacity over the next two years, the bank forecast.

Rising Investment

Company investment will “rise gradually” in response to growth in exports fed by increased U.S. demand and a weaker Canadian dollar, the bank said. “The recent depreciation of the Canadian dollar, which has reversed a small part of the earlier deterioration in Canada’s competitiveness, should help to promote stronger growth in exports,” the bank said.

“The drop in the Canadian dollar relative to the U.S. dollar fundamentally helps our business,” Don Althoff, Chief Executive Officer of Calgary-based pipeline operator Veresen Inc., said in an April 11 telephone interview.

The bank’s forecast assumes the currency will stay in its recent trading range around 91 U.S. cents.

The main risks to the inflation outlook remain stronger-than-expected U.S. demand, weakness in exports and “imbalances” in Canadian household finances, the Bank of Canada said today. The central bank reiterated the housing market is headed for a “soft landing” and that the ratio of household debt to income should stabilize.

Policy makers also added a new risk, posed by a potential major tightening of credit conditions in China and other emerging markets. Europe’s economic recovery is threatened by political tensions in Ukraine, according to the bank’s economic forecast paper.

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net

To contact the editor responsible for this story: Paul Badertscher at pbadertscher@bloomberg.net; Chris Fournier

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