Bank of Canada maintains one per cent target rate

July 17, 2012

For the fifteenth consecutive decision, the Bank of Canada announced on July 17 that the overnight rate would remain at 1.0%. Earlier in the year, some economists had been expecting an increase to the Bank’s key lending rate; however, with the continued deterioration of global economic conditions, the latest announcement had been largely anticipated.

Despite retaining its comment that a reduction of stimulus from the current monetary policy may be on the horizon, the Governor of the Bank, Mark Carney, pointed to slower than expected economic expansion in the United States, continued concern stemming from the European crisis and a greater than expected decrease in growth for emerging market economies as downside risks for global economic growth. Similar to last month’s announcement, these events have lowered commodity prices, albeit from elevated prices, degraded global financial conditions and reduced investor confidence.

The above-mentioned commentary provides some of the Bank’s rationale for maintaining its accommodative monetary policy, but does little to support the prospect of a withdrawal from stimulus.

Gross domestic product (GDP)

Global influences have, and are likely to continue having, a negative impact on Canada’s economic activity, the result of weak external demand and lower commodity prices reducing Canadian incomes and wealth.

Despite the noted downside risks, elevated household debt and a reduced contribution from government spending, the Bank continues to expect moderate economic expansion to be sourced through personal consumption and business spending, as an accommodative monetary policy remains in place.

With recognition for the above-mentioned headwinds, the Bank now expects the Canadian economy to grow by 2.1% in 2012, 2.3% in 2013 and 2.5% in 2014. Relative to April’s Monetary Policy Report, the revised forecast indicates reduced expectations for growth in 2012 and 2013, with an increase anticipated for 2014.

Inflation

Contrary to the latest announcement, Canada’s economy is not expected to reach full capacity until the latter half of 2013. With consideration for this change in expectation and reduced gasoline prices, the Bank now expects headline inflation to remain well below the 2.0% target to mid-2013.

Canadian currency

Canada’s currency appreciated slightly, relative to the U.S. dollar, as the Bank’s announcement was released; however, the change was reversed shortly thereafter.

Next announcement

The next scheduled date for announcing the overnight rate target is September 5, 2012.

Bank of Canada press release

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