BoC keeps rate steady, as expected

(October 15, 2003) The Bank of Canada has left its trendsetting interest rate untouched at 2.75%. Economists had expected no change, but many in the business community have been calling for a rate cut to fight the rise in value of the loonie.

“It was predictable, given the recent speeches but I think it was overly cautious given that inflation even in the bank’s forecast looks quite benign,” said Avery Shenfeld, senior economist with CIBC World Markets. “It couldn’t have hurt the inflation target to have cut interest rates and it might prove to be a necessary ingredient to calm the upward pull of the Canadian dollar.”

The bank pointed out that since the last policy statement on September 3, core inflation has remained within the desired range of below 2% and said that the economy is picking up both domestically and in the U.S.

“The risks are that while the U.S. is picking up, Canada doesn’t share the benefit of that glory because of the strength of the currency and what that does to Canada’s export competitiveness,” said Shenfeld.

The bank admitted the U.S. dollar has been devalued dramatically since September, but that this was against most major world currencies, not just the Canadian dollar.

“The bank is relying on stronger than expected results stateside to offset the negative impacts of a stronger Canadian dollar,” said Shenfeld. “But I think the risk is that the stronger currency is more of a drag.”

What do you think about the Bank of Canada’s decision today? Do you think the gap between the Bank of Canada rate and the U.S. Federal Reserve’s rate is too wide? Is the soaring loonie hurting the Canadian economy? Share your thoughts about this topic in the Talvest Town Hall on Advisor.ca.

Filed by Steven Lamb, Advisor.ca, slamb@advisor.ca