Confident Bank of Canada keeps loan rate at 1 per cent
Benchmark rate unchanged in four years as bank decides rise in consumer prices isn’t going to keep going
The Bank of Canada kept its main interest rate unchanged for the fourth year, saying the risks posed by slow inflation remain.
The benchmark rate on overnight loans between commercial banks stayed at 1 per cent, where it’s been since September 2010, as anticipated by all 21 economists in a Bloomberg News survey.
Canadian and global economic growth were slower than expected in the first quarter while a weaker currency and higher energy costs are only temporarily boosting consumer prices, the bank said.
“Weighing recent higher inflation readings against slightly increased risks to economic growth leaves the downside risks to the inflation outlook as important as before,” policy makers led by bank governor Stephen Poloz said in a statement from Ottawa Wednesday.
Future economic data will determine “the timing and direction” of the next move, the bank said.
Economic growth slowed in the first quarter to the lowest in more than a year, adding slack to world’s 11th largest economy and giving Poloz room to boost demand without inflation surging past his 2 per cent target. Canada’s weaker dollar and stronger foreign demand will support the exports and investment needed for a recovery, the bank said.
“The ingredients for a pickup in exports remain in place,” policy makers said in the statement. “We still expect excess supply to be absorbed gradually.”
Canada’s dollar has depreciated by almost 6 per cent against the U.S. dollar over the last year through yesterday, the most among 10 major economies tracked by Bloomberg, something that helps exporters such as Winnipeg, Manitoba-based bus maker New Flyer Industries Inc.
The central bank doesn’t have a target for the currency level and is mandated to keep consumer-price increases in the middle of a 1 per cent to 3 per cent band.
While Canada’s inflation rate quickened in April to reach 2 per cent for the first time in two years, the core rate of inflation that excludes eight volatile items “remains significantly below 2 per cent,” the bank said today.
The bank forecast in April that core inflation won’t reach 2 per cent until the start of 2016 because spare economic capacity will restrain price gains.
“There are continued signs of a soft landing in the housing market and a constructive evolution of household imbalances,” the bank also said in its statement.
Global growth was weaker than forecast in the first quarter, while the U.S. economy, which receives three-quarters of Canada’s exports, may have “slightly less underlying momentum than previously expected,” the bank said.