BoC maintains 1% overnight rate, lowers outlook

The Bank of Canada today announced it’s maintaining its target for the overnight rate at 1%. The Bank Rate is correspondingly 1.25% and the deposit rate is 0.75%.

Insisting that some modest withdrawal of monetary policy stimulus will likely be required over time, consistent with achieving the 2% inflation target, the Bank’s Monetary Policy Report (MPR) released today says the more muted inflation outlook and the beginnings of a more constructive evolution of imbalances in the household sector suggest that the timing of any such withdrawal is less imminent than previously anticipated.

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The Report also revealed a weaker outlook for global economy despite acknowledging global tail risks have diminished.

A BoC release said the slowdown in Canada in the second half of 2012 was more pronounced than the Bank had anticipated, owing to weaker business investment and exports.

Key contents of the release as follows:

Caution about high debt levels has begun to restrain household spending. The Bank expects economic growth to pick up through 2013. Business investment and exports are projected to rebound as foreign demand strengthens, uncertainty diminishes and the temporary factors that have weighed on resource sector activity are unwound.

Nonetheless, exports should remain below their pre-recession peak until the second half of 2014 owing to a lower track for foreign demand and ongoing competitiveness challenges, including the persistent strength of the Canadian dollar.

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Consumption is expected to grow moderately and residential investment to decline further from historically high levels. The Bank expects trend growth in household credit to moderate further, with the debt-to-income ratio stabilizing near current levels.

The economic expansion in the United States is continuing at a gradual pace, restrained by ongoing public and private deleveraging, global weakness and uncertainty related to fiscal negotiations.

Despite a marked improvement in peripheral sovereign debt markets, Europe remains in recession, with a somewhat more protracted downturn now expected than in October.

Growth in China is improving, though economic activity has slowed further in some other major emerging economies. Supported by central bank actions and by positive policy developments in Europe, global financial conditions are more stimulative.

Commodity prices have remained at historically elevated levels, though temporary disruptions and persistent transportation bottlenecks have led to a record discount on Canadian heavy crude.

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Relative to the October MPR, Canadian economic activity is expected to be more restrained. Following an estimated 1.9% in 2012, the economy is expected to grow by 2% in 2013 and 2.7% in 2014. The Bank now expects the economy to reach full capacity in the second half of 2014, later than anticipated in the October MPR.

Opening statement by Mark Carney, Governor of the Bank of Canada, at a press conference following the release of the Monetary Policy Report, here.