News & information archive



News home

September 7, 2011

Bank of Canada maintains a target rate of one per cent

In a widely anticipated announcement, the Bank of Canada kept its target for the overnight rate at 1.0%. Since its last increase of 0.25% on September 8, 2010, the central bank’s rate has remained unchanged for nearly a full year.

According to Bank of Canada governor, Mark Carney, several of the downside risks highlighted in the Bank’s July Monetary Policy Report (MPR) have been realized. The sovereign debt crisis in Europe has gained strength, data revisions from the United States have indicated that the recession was worse than previously noted, the corresponding recovery in the United States has been weaker than previously stated, and global financial markets have become increasingly volatile as signs of slower global growth have come to light. Furthermore, the Bank’s expectation for the U.S. economy is that household spending will be more subdued and the withdrawal of fiscal stimulus will be an additional drag on American economic growth. Outside of North America, Mr. Carney suggested that a resolution to fiscal and financial strains in Europe will require significant initiatives by authorities. In the meantime, there will likely be continued risk aversion by investors. Growth among emerging market economies has been strong and supportive of high commodity prices; however, future growth will be affected by weakness in more developed economies.

After the Bank of Canada’s announcement on July 19, 2011, sentiment amongst many economists suggested that an increase to the Canadian overnight lending rate by the end of the year was imminent. These expectations were fuelled by the Bank removing the word “eventually” from its comment on the timing of withdrawing some monetary stimulus. The Bank’s latest comments, however, suggest a significantly more negative tone. Today’s announcement did not include the long- standing comment regarding the removal of considerable monetary stimulus. Removing this comment could be interpreted by some economists as a sign that the Bank is considering further stimulus to support the Canadian economy.

Gross domestic product (GDP)

Canada’s economic growth in the second quarter contracted by 0.4% as temporary factors, including supply chain disruptions from Japan, flooding, and forest fires in Northern Alberta, reduced output by more than the Bank had predicted.

Looking forward, the Bank expects growth to resume as continued strength from business investment, supported by high commodity prices, and consumer spending, bolstered by employment growth and reduced inflation, lead the Canadian economy. Downside risks to this expectation include the impact from a reduction of consumer wealth and a tightening of credit availability should global financial conditions deteriorate further. Net exports, one of the Bank’s key contributors to sustainable economic growth, is expected to remain a source of weakness for economic growth in Canada as global demand moderates and the Canadian dollar remains strong, reducing Canada’s competitive position in the global market.

Inflation

Temporary factors, including elevated food and energy prices, are expected to moderate and, correspondingly, headline inflation is expected to slow. Although the Bank did not reference their expectation that the economy would return to full capacity by the middle of 2012, Mr. Carney had previously suggested that CPI inflation would return to 2.0% at this time. Expectations of slower growth in the global economy will likely reduce demand for domestic resources and, consequently, serve to further mitigate elevated headline inflation.

Canadian currency

The positive tone in the Bank’s announcement had little direct impact on the Canadian dollar. At 10:15 a.m. on September 7, 2011, the CAD had increased from the previous day’s closing price of $1.0103 USD to $1.0126 USD.

Next announcement

The next scheduled date for announcing the overnight rate target is October 25, 2011.

Bank of Canada press release