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January 18, 2011

Bank of Canada maintains target rate at one per cent

The Bank of Canada held the overnight rate target at 1.0% on January 18, 2011. Similar to the previous announcement on December 7, 2010, the Bank’s decision was widely anticipated by economists.

The Bank also announced that the economic recovery is proceeding more quickly than anticipated across the globe. More specifically, with support from additional monetary and fiscal stimulus, improving domestic demand in the United States will remain supported. Despite continued reports regarding sovereign and private bank balance sheet problems from Europe, growth in the continent has been stronger than the Bank had anticipated.

Gross domestic product (GDP)

Following December’s theme of an increase in business spending and net exports replacing the Canadian consumer as key drivers for the economic recovery, the Bank stated that government spending will decline in 2011. Further, with high levels of household debt, the domestic consumer is expected to reduce consumption.

Supported by an improving economic recovery in the United States and continued resource demand from emerging markets, net exports are projected to contribute more to the Canadian economic recovery; however, expected strength in net exports are hindered by a strong Canadian dollar. Released last week, the Bank of Canada’s Business Outlook Survey supports the Bank’s view that business investment should build on the strong growth reported in the third quarter of 2010.

In the October Monetary Policy Report (MPR), the Bank of Canada projected that GDP growth would be 2.3% in 2011 and 2.6% in 2012. Included with today’s announcement, the Bank has increased their projections to 2.4% expansion in 2011 and 2.8% in 2012.

Inflation

The Bank reiterated its previous statement that core inflation would move to its 2.0% target by the end of 2012 as production returns to full capacity. Total consumer price index (CPI), although higher than target in October and at target in November due to changes in provincial taxes, is expected to be at 2.0% by the end of 2012.

Canadian currency

Although the announcement had been widely anticipated, the Canadian dollar depreciated versus the U.S. dollar, but remained above parity.

The next scheduled date for announcing the overnight rate target is March 1, 2011.

Tighter mortgage rules also announced

Interest rate changes can have a large impact on the cost of borrowing, and with the high household debt in Canada, many Canadians would be adversely impacted by any increase in interest rates. This may have been a factor in Federal Finance Minister Jim Flaherty’s announcement of tighter mortgage rules on January 17, 2011, ahead of today’s interest rate announcement. Changes in mortgage rules include:


These measures are intended to reduce home ownership costs and exposure to the financial risks of over borrowing for Canadians.

Bank of Canada press release: www.bankofcanada.ca/en/fixed-dates/2011/rate_180111.html

Mortgage rule press release: www.fin.gc.ca/n11/11-003-eng.asp