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January 17, 2012

Bank of Canada maintains one percent target rate

Canada’s central bank kept its target for the overnight rate unchanged for the eleventh consecutive meeting. At 1.0%, the rate has remained the same since September 8, 2010, when it was increased to 1.0% from 0.75%.

Similar to the announcement of December 6, 2011, the Bank reiterated that global conditions have deteriorated since the October Monetary Policy Report as a result of expectations for a deeper than anticipated recession in Europe, decelerating growth in China and the potential for a more modest pace of recovery in the United States.

Although economic data from the United States were stronger than anticipated in the latter half of 2011, the Bank expects the recovery to moderate as households continue to deleverage, fiscal constraints are implemented, and the effects from a European recession spill into the American economy.

With global economic growth expected to slow, the Bank also expects commodity prices, with the exception of oil, to be lower than had been previously predicted for 2013.

By keeping the target rate at 1.0%, the Bank stated that it has maintained considerable monetary stimulus for the Canadian economy.

Gross Domestic Product (GPD)

During the announcement, the Bank suggested that the Canadian economy grew at a faster rate than anticipated in the last six months of 2011, but that little had changed regarding the Bank’s outlook that growth would be more moderate going forward.

Specifically, net exports will continue to be a source of weakness as long as external demand remains poor and the Canadian dollar stays elevated. Business spending is expected to stay strong, despite global uncertainty, as commodity prices are already at elevated prices and access to favourable financing remains available. Along the lines of credit remaining accessible, the Canadian consumer is expected to remain the main driver of economic growth, as the ratio of household debt to income is expected to increase beyond its current record highs.

According to the latest announcement, the Bank projects that the economy will expand by 2.4% in 2011, 2.0% in 2012 and 2.8% in 2013.

Inflation

Although there has been little change to inflation since the October Monetary Policy Report, the Bank updated its projection by stating that headline and core inflation are expected to moderate in 2012, and eventually increase back toward the 2.0% target by the third quarter of 2013. It is important to note that this projection is one quarter sooner than had previously been disclosed.

Canadian currency

The decision to maintain interest rates had little impact on the Canadian currency, as the loonie held steady at $0.9855CAD as of 9:03 a.m. on January 17.

Next announcement

The next scheduled date for announcing the overnight rate target is March 8, 2012.

Bank of Canada press release - 17 January 2012