Bank of Canada stands pat on key interest rate

Overnight lending rate has been set at 1% since September 2010

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The Bank of Canada made no change in its key policy interest rate this morning as expected, leaving it at the one per cent level it has been at for the past three years.

The central bank said low interest rates will remain “appropriate” as long as inflation and growth in Canada remain subdued.

The bank noted that the global economy continues to expand, but its “dynamic has moderated,” saying that recent data suggested “slightly less momentum overall” in the U.S. than anticipated.

But it said financial volatility has increased in a number of emerging economies, with the notable exception of China, which it says is still showing “solid” economic growth.

The Bank of Canada also noted that the housing sector has been “slightly stronger than anticipated,” and said household credit growth has continued to slow in the presence of higher mortgage rates.

The policy statement the bank released along with its rate decision was similar in tone to the last one in July.

No rate rise likely for a year

Currently, markets are widely expecting no change in the key overnight lending rate for at least another year.

“The bottom line is that we are still looking at a very long period of inactivity by the Bank [of Canada], and may well be talking about four years of unchanged rates a year from now,” said Douglas Porter, BMO Capital Markets chief economist, in a commentary.

“Officially, we are looking for the Bank to start raising rates in [the third quarter of] 2014, but that is contingent on our view that the U.S. economy will pick up meaningfully in coming quarters,” he said.

Economists at some other bank investment firms — like CIBC World Markets and Scotia Capital Markets — don’t expect a hike in the overnight lending rate until early 2015.

The Canadian dollar rose a third of a cent and closed Wednesday at 95.31 cents US.

Wednesday marked the second rate policy announcement that new Bank of Canada governor Stephen Poloz has presided over since taking over in June. So far, he hasn’t strayed from the monetary policy track set by his predecessor, Mark Carney.

Poloz told a House of Commons committee in June that he foresaw no shift from the current low interest rate policy under his leadership, at least in the short term, despite fears it is creating imbalances in the economy.

Although keeping rates low for a long period has a distorting impact on the economy, including triggering excessive borrowing, Poloz said the central bank must also consider the risk to the fragile economy of raising rates too soon.

Rates are unlikely to rise in the presence of weak growth — both domestically and internationally. Statistics Canada reported last week that growth in the second quarter slowed to an annualized rate of 1.7 per cent.

CBC News Posted: Sep 4, 2013 8:41 AM

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