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Bank of Canada Keeps Neutral View on 1% Rate

Bank of Canada Governor Stephen Poloz
Bank of Canada Governor Stephen Poloz speaks during an interview in Sydney, Australia, on Feb. 22, 2014. Photographer: Ian Waldie/Bloomberg

Bank of Canada Governor Stephen Poloz kept his main interest rate unchanged and reiterated the next move depends on the progress of economic data after early signs of faster growth and inflation.

Policy makers kept the benchmark rate on overnight loans between commercial banks at 1 percent, where it’s been since September 2010, as expected by all 20 economists in a Bloomberg News survey.

“The fundamental drivers of growth and inflation in Canada continue to strengthen gradually,” policy makers led by Poloz, 58, said in a statement from Ottawa today. “The Bank judges that the balance of risks remains within the zone for which the current stance of monetary policy is appropriate.”

The decision follows three prior announcements where the bank suggested an easier path for monetary policy, which took the country’s dollar to four-year lows. The world’s 11th-largest economy still faces challenges from indebted consumers to weak exports and investment that will keep inflation “well below” the 2 percent target this year, the bank said.

“They have almost gone out of their way to make it clear they are neutral,” Robert Kavcic, a Bank of Montreal senior economist, said by phone from Toronto.

Today’s statement made no reference to the currency, which was 0.3 percent stronger at C$1.1058 per U.S. dollar at 11:27 a.m. in Toronto. Government bonds were little changed, with debt due in two years unchanged at a yield of 1.03 percent.

Policy makers said global financial markets have been more volatile, adding that “tensions in the Ukraine have added to geopolitical uncertainty.”

Inflation Concerns

Concerns about slow inflation eased last month as Statistics Canada said the consumer price index accelerated more than forecast to 1.5 percent in January. The last report on economic growth, issued last week, showed expansion at a 2.9 percent annual pace at the end of last year, suggesting the economy has less spare capacity than the bank projected.

“We see the Bank of Canada as a patient institution that views the substantial monetary policy stimulus currently in place as a necessary cushion” against conflicting economic risks, Bricklin Dwyer, an economist at BNP Paribas in New York, wrote in a client note. The bank “will be ready to ease if inflation deteriorates further, the housing market corrects sharply or consumption slows substantially.”

Slower Growth

Canada’s economy will grow by about 2.5 percent this year, with growth probably below that pace in the first quarter, the central bank said today. The Bank of Canada’s one-page statement made six references to economic factors that are evolving about as policy makers forecast in January.

The Canadian dollar weakened as far as C$1.1224 per U.S. dollar in the days after the Jan. 22 monetary policy report, which said that the currency “remains strong and will continue to pose competitiveness challenges for Canada’s non-commodity exports.”

The weakness isn’t translating into large or rapid gains for manufacturing, according to Alain Bedard, Chief Executive Officer of Montreal-based trucker TransForce Inc. “The depreciation of the Canadian dollar could have some effect in the manufacturing sector of Canada,” he said on a Feb. 27 earnings call. “We are starting to see a little bit more activity in our truckload sector right now.”

The central bank in January said it will take about two years for inflation to return to policy makers’ 2 percent target because of slack in the economy and intense retail competition.

Neutral Bias

“The timing and direction of the next change to the policy rate will depend on how new information influences this balance of risks,” the central bank said today, echoing its January statement. “With inflation expected to be well below target for some time, the downside risks to inflation remain important.”

The central bank may delay a rate increase until the third quarter of 2015, according to Derek Burleton, deputy chief economist at Toronto-Dominion Bank.

“I didn’t see any meaningful shift in today’s statement,” Burleton said by phone from Toronto. “Rates are going nowhere for a considerable period.”

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