Bank Of Canada Keeps Interest Rate At 1 Per Cent

(The Canadian Press) -- OTTAWA - The Bank of Canada is keeping interest rates at super-low levels and giving few hints when it might start raising them again.

For the sixth straight announcement date, the central bank said Tuesday the economy is not strong enough for monetary tightening and kept the trendsetting policy rate at one per cent, where it has been since last September.

But in an accompanying statement, the bank did change its advisory on future action, indicating it is anxious to start moving rates closer to their normal levels. The problem, the bank said, is that the conditions are not right yet.

"To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be eventually withdrawn," it says.

"Such reduction would need to be carefully considered."

That last phrase, said CIBC chief economist Avery Shenfeld, puts the odds of a move in July at less than 50 per cent. He predicted the bank will begin tightening in September, with the overnight rate being raised to 1.75 per cent by the end of the year.

Given the uncertainty in the global recovery, Tuesday's inaction was widely predicted.

Policy-makers, including Bank of Canada governor Carney, have of late taken to setting off warning flares about rising risks to the world economy, although the tone in the bank's statement was less alarmist this time.

The bank takes note of risks, in particular the European debt crisis, high commodity prices and the strong Canadian dollar, as well as the temporary disruptions caused by Japan's dual natural and nuclear disasters ? all of which bank's governing council have highlighted before.

But the bank says it has not changed its mind that the economic expansion will continue. The global recovery is proceeding broadly as outlined in its last policy review in April, it says, and so is Canada's.

It says while supply chain disruptions emanating from Japan will cause Canada's second-quarter growth to fall sharply, it will remain positive, and the momentum will be resumed later in the year.

"Although temporary supply chain disruptions are expected to restrain growth sharply in the current quarter, this is expected to be unwound in subsequent quarters," the bank reasoned.

As well, Carney remains convinced that inflation pressures caused by high commodity prices are a temporary phenomenon, at least in Canada.

"The bank expects that high energy prices and changes in provincial indirect taxes will keep total CPI inflation above three per cent in the short term," it says. "Total CPI inflation is expected to converge with core inflation at two per cent by the middle of 2012 as excess supply in the economy is gradually absorbed, labour compensation growth stays modest, productivity recovers and inflation expectations remain well-anchored."

The risk to higher inflation is that household borrowing grows, given low rates, but on the other hand, the bank says, the strong Canadian dollar should keep prices of imports in check.

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Source: http://www.huffingtonpost.ca/2011/05/31/bank-of-canada-interest-rates_n_869023.html

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