News & information archive



News home

July 20, 2011

Bank of Canada maintains a target rate of one per cent

On July 19, 2011, the Bank of Canada held its overnight target rate at 1.0%. The central bank’s rate has not changed since September 8, 2010.

According to Mark Carney, the Bank of Canada governor, global economic growth is proceeding broadly in line with expectations noted in the April Monetary Policy and continues to reflect a two-speed recovery. There is evidence of modest expansion in major advanced economies and more robust growth in emerging economies. The Bank admitted that U.S. economic growth has been slower than expected, restrained by the consolidation of household balance sheets and slow employment growth. Growth in Europe’s core has been stronger than expected, but fiscal austerity measures will hold back continued growth. Although the Japanese economy has begun to recover from the natural disaster in March, the level of economic growth is likely to remain below prior expectations. As noted, the Bank of Canada stated that growth in emerging market economies remains strong.

Overall, financial conditions remain very stimulative in support of Canada’s economic recovery. The Bank maintained its view that a future reduction in monetary policy stimulus would need to be carefully considered, perhaps forecasting a future increase in rates by removing the word “eventually” from its comment on the timing of withdrawing the considerable stimulus.

Gross domestic product (GDP)

The Bank stated that economic growth in Canada is proceeding in line with expectations; however, demand has been slightly slower than predicted. One of the Bank’s two keys to a sustainable economic recovery, business investment, has been strong. Net exports, the Bank’s second key contributor to sustained growth, has been weak, reflecting moderate economic growth in the United States, Canada’s largest trade partner, and competitive challenges, particularly the strong Canadian dollar. Despite repeated warnings from the Bank about the level of debt amongst Canadian consumers, household spending has remained strong and continues to support economic growth.

In line with the April Monetary Policy Report, the Bank expects growth to resume in Canada for the second half of the year. The temporary supply chain disruptions and elevated energy prices that slowed growth in the second quarter are easing. Business spending, particularly in western Canada, is expected to remain strong, but net exports are expected to be slightly weaker as a reflection of subdued economic growth in the United States. Household spending is expected to maintain its strength as growth in household spending aligns with higher household income. The Bank is now projecting that the economy will expand by 2.8% in 2011 versus its prior projection of 2.9%. Growth in 2012 and 2013 remained unchanged at 2.6% and 2.1%, respectively.

Inflation

Headline inflation is expected to stay above 3.0% in the near term as higher food and energy prices support elevated costs for consumers. Believing these factors to be transitory, the Bank reiterated its expectation that the Consumer Price Index will contract to 2.0% by the middle of 2012. The Bank expects core inflation, on the other hand, to remain close to 2.0% until the economy returns to full capacity by the middle of next year. This is a reflection of faster than expected core inflation versus the Bank’s April’s statement that core inflation would not reach 2.0% until the middle of next year.

Canadian currency

The Bank’s announcement had been widely anticipated; however, the Canadian dollar increased from a closing price of $1.0429 USD on July 18, 2011 to $1.052 USD at noon on July 19, 2011.

Next announcement

The next scheduled date for announcing the overnight rate target is September 7, 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. The effects of potential changes in interest rates continue to be top of mind for investors, especially those with bond portfolios, and we are watching these developments closely. We believe that short-term rates in Canada are likely to remain low until longer-term inflation signals become more apparent. We encourage you to remain focused on your long-term plan, and contact your advisor if you have any questions about your portfolio.

Bank of Canada press release