Bank of Canada Keeps Key Interest Rate 1% Amid `Slightly Faster' Recovery
The Bank of Canada kept its benchmark interest rate unchanged, and policy makers said they will carefully consider future increases in a recovery that is “slightly faster” than they forecast.
The target rate for overnight loans between commercial banks remains 1 percent, where it has been since September, in a decision predicted by all 29 economists surveyed by Bloomberg News.
“There is early evidence of a recovery in net exports, supported by stronger U.S. activity and global demand for commodities,” Governor Mark Carney, 45, and his five deputies said in a statement. Exporters still face “considerable challenges” from a currency trading near a three-year high and “poor relative productivity,” the Ottawa-based bank said.
The recovery in the world’s 10th-largest economy is being bolstered by the biggest jump in exports since 2004 during the fourth quarter and job creation in January that quadrupled forecasts. Policy makers reiterated today that there remains “considerable slack” in the economy that will help keep inflation close to their 2 percent target, and that the global recovery is threatened by Europe’s banking and fiscal crisis.
Canada’s currency fell 0.3 percent to 97.43 cents versus the U.S. dollar at 10:30 a.m. in Toronto, compared with 97.16 yesterday, after touching 96.84, the strongest level in more than three years. One Canadian dollar purchases $1.0264.
The June bankers’ acceptance contract yield, which is tied to forecasts about the central bank rate, fell to 1.46 percent from 1.50 percent yesterday.
“The Bank of Canada is on hold and they don’t want to signal a rate hike anytime soon,” said Michael Gregory, a senior economist at BMO Capital Markets in Toronto. “I don’t see any step at all toward the hawkish side,” he said, adding the statement was “acknowledgment of what’s on the ground already.”
Canada’s decision will be followed in the next two weeks by all other central banks from the Group of Seven nations, including the European Central Bank on March 3 and the U.S. Federal Reserve and Bank of Japan on March 15. Canada will raise rates in the second quarter while the Fed will stay on hold until the fourth quarter, according to Bloomberg surveys of economists.
“Any further reduction in monetary policy stimulus would need to be carefully considered,” the bank said today, echoing its last decision in January. “The recovery in Canada is proceeding slightly faster than expected, and there is more evidence of the anticipated rebalancing of demand” from stimulus measures and consumer spending to exports and business investment, the statement said.
The central bank said that “geopolitical events” may give a temporary boost to commodity prices. Goods such as crude oil and metals make up 45 percent of Canada’s exports. Demonstrations in nations from Libya to Bahrain have led to higher oil prices that threaten to slow economic growth in countries that import energy.
“What I see is a lot of uncertainty” in the economy, said Merrell Moorhead, a business planning consultant in Halifax, Nova Scotia. “Most businesses would say don’t do anything sudden” on interest rates, he said.
Canada’s gross domestic product grew at a 3.3 percent annualized pace in the fourth quarter, led by exports and consumer spending. The Bank of Canada predicted in January the economy grew at a 2.3 percent pace in the fourth quarter.
“They recognized that strength but they don’t carry it forward too much for the rest of the year,” said Pascal Gauthier, an economist at Toronto-Dominion Bank.
Gauthier and Gregory at BMO Capital Markets both predict a July rate increase.
The bank increased its key policy rate three times last year to 1 percent from a record 0.25 percent on signs Canada was recovering from a recession. More interest-rate increases may boost the Canadian dollar and slow shipments abroad from companies such as auto parts maker Magna International Inc.
The Canadian dollar rose to a three-year high after the Feb. 28 gross domestic product report from Statistics Canada, which followed the agency’s Feb. 4 estimate that 69,200 jobs were created in January.
Prime Minister Stephen Harper’s plan to support the recovery through corporate tax cuts as government stimulus measures expire could lead to an election. Finance Minister Jim Flaherty is scheduled to present a budget this month and needs the support of one opposition party for it to pass, while Liberal Party Leader Michael Ignatieff said he favors spending on education and worker training over tax cuts passed in previous budgets.
To contact the reporter on this story: Greg Quinn in Ottawa at firstname.lastname@example.org