Bank stands pat on rates

Surprising virtually no one, the Bank of Canada will maintain its target overnight rate at 1%. The corresponding bank rate will remain at 1.25% and the deposit rate will still be 0.75%.

Heightened uncertainty around global economic outlook has decreased significantly since the Bank released its January Monetary Policy Report due to signs of stabilization in European bank funding and sovereign debt markets.

The Bank considered several global factors in its decision to hold the line on rates. With the target interest rate near historic lows and the financial system functioning well, there is considerable monetary policy stimulus in Canada.

Conditions in global financial markets have also improved and risk aversion has largely decreased. The global economy, however, is still expected to grow below its trend rate as the deleveraging process continues in advanced economies.

“Although risks have eased somewhat, the outlook for growth for the next few quarters remains relatively moderate,” says Benoit P. Durocher, senior economist, Desjardins. “The substantial monetary stimulus that is currently in place should continue for several more quarters.”

He pointed out that a number of uncertainties persist, supporting loose monetary policy for some time to come.

“Financial markets remain fragile, with the sovereign debt problem still not definitively solved,” Durocher says. “The global growth outlook remains modest due, among other things, to the many budget cuts underway in most industrialized nations. In the United States, despite the slightly more encouraging signs, the recovery is promising to be slow and gradual, particularly in employment and the real estate market.”

In the U.S., expansion has recently been reinforced by the improving labour market and is proceeding at a modest pace. Meanwhile in China, growth is moderating to a still-high rate in response to past policy tightening and weaker external demand.

Commodity prices have continued to exceed all expectation, supported by improved global economic conditions and a geo-political risk premium on oil, which could ultimately dampen the improvement in global economic momentum if it persists.

The Canadian economy has improved marginally from the January MPR. Growth is expected to remain at trend, due to the balancing act between domestic strength and external weakness in coming months, despite the fact that it’s been improving faster than forecast.

The forecast for private demand is slightly stronger than projected as a result of improved sentiment and highly supportive financial conditions, with household spending expected to remain high relative to GDP as households add to their debt burdens.

Net exports have been boosted by stronger-than-anticipated U.S. activity but will contribute little to growth, reflecting still-moderate foreign demand and ongoing competitiveness challenges posed by factors such as the persistent strength of the Canadian dollar.

The profile for core and total CPI inflation is firmer due to reduced economic slack and higher oil prices. After moderating in the second quarter, total inflation is expected to be around 2% over the forecast horizon.

The Bank plans to set monetary policy consistent with achieving the 2% inflation target over the medium term.