Newspaper article The Canadian Press

Growth Stronger Than Expected but Bank of Canada Keeps Policy Rate Unchanged

Newspaper article The Canadian Press

Growth Stronger Than Expected but Bank of Canada Keeps Policy Rate Unchanged

Article excerpt

BoC keeps policy rate at one per cent


OTTAWA - The Bank of Canada signalled Wednesday that the country's slumbering economy will require the stimulant of artificially low interest rates for some time to come, although it conceded first-quarter growth was surprisingly perky.

As expected, outgoing governor Mark Carney's last public move at Canada's central bank was to stick to the course he has charted since September 2010, keeping the trendsetting policy rate at one per cent to induce continued borrowing and spending on the part of consumers and businesses.

As well, the bank statement kept in place its forward looking guidance to markets that the current policy position will likely be needed for some additional time, after which Canadians should look for a modest increase in interest rates.

Some analysts had speculated the outgoing Carney, who departs for the Bank of England as of Saturday, might remove the tightening guidance but the statement released Wednesday showed no such inclination.

Perhaps also expecting a more dovish statement, the immediate market reaction was to boost the Canadian dollar about a quarter of a cent -- although the loonie remains near an 11-month low against the U.S. currency.

The loonie ended the trading day up 0.4 of a cent at 96.6 cents US.

Bank of Montreal economist Doug Porter said he would have supported dropping the hawkish bias, given that the economy remains weak, the housing market has cooled considerably and inflationary pressures are non-existent.

But he said if there was a thought to change course to a neutral stance -- which would signal a longer duration of low interest rates -- Carney likely wanted to leave the call to his successor Stephen Poloz, who assumes his duties on June 3.

"I think the last thing he wants to do is rock the boat on the way out when there was no need," Porter explained. "(Also) this reinforces the point that the decision is not made by one person alone, there is a whole institution here and a whole process."

In essence, the bank is saying that the Canadian economy continues to require considerable monetary stimulus in order to keep its head above water, given that governments are providing little, the housing market is in decline, commodity prices are weak, and the export sector, while recovering, continues to be hampered by a strong dollar, weak demand and competition.

It predicts Canada's economy won't return to full capacity until mid-2015, which some economists suggest may be the point where Canadians should expect to see interest rates normalize.

An indication whether Poloz's new eyes sees the situation differently will have to wait until June 19, when he is due to deliver his first speech, but more likely July 17, when the bank issues an updated opinion on global forces and the Canadian economy.

The Carney bank has good company in its current assessment, however. …

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