Canada Keeps Key Rate at 1%, Sees Low Inflation Risks

The Bank of Canada kept its main interest rate unchanged with a neutral bias on its next move, saying the risks posed by low inflation remain.

The benchmark rate on overnight loans between commercial banks stayed at 1 percent, where it’s been since September 2010, as anticipated by all 21 economists in a Bloomberg News survey. Canadian and global economic growth were slower than expected in the first quarter while a weaker currency and higher energy costs are only temporarily boosting consumer prices, the bank said.

“Weighing recent higher inflation readings against slightly increased risks to economic growth leaves the downside risks to the inflation outlook as important as before,” policy makers led by Governor Stephen Poloz, 58, said in a statement from Ottawa today. Future economic data will determine “the timing and direction” of the next move, the bank said.

Economic growth slowed in the first quarter to the lowest in more than a year, adding slack to world’s 11th largest economy and giving Poloz room to maintain loose policy without inflation surging past his 2 percent target. Canada’s weaker dollar and stronger foreign demand will support the exports and investment needed for a recovery, the bank said.

“There’s nothing in here saying a move is imminent,” Paul Ferley, assistant chief economist at Royal Bank of Canada, said by telephone from Toronto. He predicts a rate increase in the second quarter of next year.

Weaker Dollar

Canada’s dollar weakened 0.4 percent to C$1.0952 per U.S. dollar at 11:11 a.m. Toronto time. It has depreciated 5.6 percent against the U.S. dollar over the last year, the most among 10 major economies tracked by Bloomberg. Short-term Canadian government bond yields declined, including the security due in two years, which fell to 1.06 percent from 1.07 percent.

There is “little in the way of market expectation for a move over the next year” in the policy rate, Jack Spitz, managing director of foreign exchange at National Bank of Canada, said from Toronto. Traders reacted to the Poloz statement by also selling Canadian dollars against the euro and Japanese yen, although moves were “muted” before tomorrow’s European Central Bank decision, Spitz said.

The weaker Canadian dollar can help exporters such as Winnipeg, Manitoba-based bus maker New Flyer Industries Inc. Poloz has said Canada is in a two-speed recovery with some commodity producers benefiting from high prices while others exporters have struggled.

Inflation Target

“The ingredients for a pickup in exports remain in place,” policy makers said in the statement. “We still expect excess supply to be absorbed gradually.”

The central bank doesn’t have a target for the currency level and is mandated to keep consumer-price increases in the middle of a 1 percent to 3 percent band.

While Canada’s inflation rate quickened in April to reach 2 percent for the first time in two years, the core rate of inflation that excludes eight volatile items “remains significantly below 2 percent,” the bank said today.

The bank forecast in April that core inflation won’t reach 2 percent until the start of 2016 because spare economic capacity will restrain price gains.

“There are continued signs of a soft landing in the housing market and a constructive evolution of household imbalances,” the bank also said in its statement. Earlier today, the Toronto Real Estate Board reported resales rose 11.4 percent in May from a year earlier, with the average selling price climbing 8.3 percent in Canada’s largest city.

Global growth was weaker than forecast in the first quarter, while the U.S. economy, which receives three-quarters of Canada’s exports, may have “slightly less underlying momentum than previously expected,” the bank said.

Canada’s merchandise trade balance unexpectedly swung to a deficit in April as energy exports declined amid refinery shutdowns, the statistics agency said today. The deficit of C$638 million ($584 million) followed a revised surplus of C$766 million in March.

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