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December 7, 2010

Bank of Canada continues to maintain target rate at one per cent

The Bank of Canada maintained its target for the overnight rate at 1.0% on December 7, 2010. The announcement had been widely anticipated as economic growth in Canada is proceeding at a moderate pace.

In a statement accompanying the announcement, the Bank of Canada said that economic activity in the latter half of the year has been weaker than what had been projected in the October Monetary Policy Report (MPR).

Gross domestic product (GDP)

When the previous interest rate announcement was made in October, the Bank of Canada stated that an increase in business spending and net exports would replace the Canadian consumer as key drivers for the ongoing economic recovery.

During the third quarter, household spending was stronger than anticipated and businesses took steps to pick up the expected slack by increasing investment in structures, machinery, and equipment; however, partially due to a strong Canadian dollar, net exports were weaker than projected and provided substantial detriment to GDP growth.

In light of moderate growth and increased risk of renewed strains in global financial markets, the Bank maintained its stance that "any further reduction in monetary policy stimulus would need to be carefully considered."

Inflation

Although the level of inflation in Canada increased broadly in October, the Bank of Canada said that excess supply in the Canadian economy remains significant and the economy will not return to full capacity until the end of 2012. As such, Mark Carney, the Bank of Canada’s governor, said that inflation dynamics are in line with expectations and the considerable monetary stimulus will remain in place.

Canadian currency

Given that the announcement had been widely anticipated, there was little change in the Canadian dollar/U.S. dollar exchange rate.

The next scheduled date for announcing the overnight rate target is January 18, 2010.

Stay the course

Monitoring the Bank of Canada’s interest rate announcements is just one of the many economic factors that we follow at MD to ensure we make the right decisions for your investments. We encourage you to remain focused on your long-term financial plan and make sure that your current mix of investments matches the strategic asset allocation appropriate for your financial purposes.

Bank of Canada press release: www.bankofcanada.ca/en/fixed-dates/2010/rate_071210.html