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April 12, 2011

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

In a widely anticipated move, the Bank of Canada maintained its overnight target rate at 1.0% on April 12, 2011. The central bank’s rate has not changed since its 0.25% increase on September 8, 2010.

The Bank of Canada governor, Mark Carney, acknowledged that the global economic recovery is proceeding in line with expectations noted in the January Monetary Policy Report (MPR) and is expected to continue. According to the Bank, growth in the United States economy has been improving, however, contraction of household and government balance sheets will impede the pace of expansion. Economic expansion in Europe has gained strength despite the challenges in the continent’s periphery. The natural disasters impacting Japan will slow growth in the first half of 2011 and create short-term supply chain disruptions to developed economies. Mr. Carney also reiterated his comments that demand from emerging market economies, combined with supply shocks from geopolitical events, continue to provide strength for commodity prices.

Finally, global financial conditions remain stimulative and investors have shown an increased willingness to embrace risk.

Gross domestic product (GDP)

Economic growth in Canada continues to proceed more rapidly than the Bank of Canada had expected. In January, Canada’s GDP expanded 0.5%, the fourth consecutive gain.

The Bank’s key components for Canada’s economic recovery: net exports and business spending, have been improving, whereas government and household expenditures have reduced their contribution to growth. Going forward, the Bank expects business investment to continue to increase and consumer spending to be aligned with personal disposable income, with a slightly higher projection due to improved terms of trade and wealth. The continued strength of the Canadian dollar is likely to be a drag on the recovery as net exports are restrained by expected competitive challenges.

During the announcement, the Bank updated its growth forecasts for the Canadian economy. In 2011, economic growth is expected to be 2.9%. Growth in 2012 is projected to reach 2.6% and the economy will return to capacity in the middle of year, two quarters earlier than the projection described in the January MPR. Canada’s economy in 2013 is expected to equal potential output and expand by 2.1%.

Inflation

Despite Canada’s 2.2% headline inflation, recorded in February 2011, core inflation remains subdued. The Bank expects total CPI inflation to reach 3.0% in the second quarter of this year before converging to the target rate by the middle of 2012. This expectation is based on the recent acceleration of energy prices and the introduction of HST and other changes to provincial taxes.

Canadian currency

Although the announcement was widely anticipated by economists, the Canadian dollar weakened relative to its U.S. counterpart. On April 8, 2011, the Canadian dollar reached $1.0496; its strongest level since November 14, 2007. After the Bank of Canada’s announcement, the Canadian dollar retrenched to only slightly more than $1.04. It is worth noting the Bank’s comment that persistent strength from the Canadian dollar could create additional difficulty for the Canadian economy by pressuring downward inflation through weak net exports and lower import prices.

Next announcement

The next scheduled date for announcing the overnight rate target is May 31, 2011.

Maintain a long-term focus

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. While this interest rate announcement may have short-term impact on certain areas of the economy or markets, we encourage you to remain focused on your long-term financial plan.

Bank of Canada press release