Loonie hits 4-year low as Bank of Canada holds rate at 1%

Target for the overnight rate hasn’t changed since late 2010

The Bank of Canada kept its benchmark interest rate steady at one per cent today, continuing its longest stretch of inaction on record.

Canada’s central bank last changed its target for the overnight rate in late 2010, when it was raised to its current level. The bank announces its latest policy decision on interest rates every six weeks, and the bank has now stood pat for 26 consecutive policy meetings.

In a statement accompanying Wednesday’s decision, the bank said it expects inflation to remain lower than previously anticipated for the next little while. It also said it expects a soft landing in the housing market.

The bank did, however, note that the economy fared better to finish 2013 than it was expecting — expanding by 2.5 per cent in the fourth quarter.

For the full year, the bank is projecting the economy grew by 1.8 per cent in 2013 and will pick up to 2.5 per cent in both 2014 and 2015.

The bank wasn’t expected to raise or lower rates on Wednesday, but watchers are closely parsing the statement to gauge which direction the bank is heading in — a rate hike to cool inflation, or a rate cut to stimulate the economy.

The tone of the statement suggests the bank is in no hurry to raise rates any time soon. “With core inflation well below target, markets are increasingly pricing in a rate cut by the Bank of Canada,” CIBC said in a commentary published Wednesday morning.

The loonie plunged in the immediate aftermath of the news, shedding more than half a cent to trade at 90.50 cents US.

After spending much of the past three years either just below par or slightly above its U.S. counterpart, the loonie has fallen precipitously in recent weeks. The loonie is now just above the 90 cent level, a threshold it hasn’t passed under since July 2009.

Andrew Pyle, a senior wealth advisor at ScotiaMcLeod, says he believes the Bank of Canada wants a lower dollar to boost exports. 

“We’ll probably see the Canadian dollar get down to 85 cents against the U.S. dollar and that means we’re not going to see any rate cuts in Canada,” he said in an interview with CBC’s The Lang & O’Leary Exchange.  

Pyle noted the Bank of Canada’s statements centring on weak inflation, but said he’s not worried about that in the long term, as the strength of the Canadian dollar over the last few years has led to lower prices here.

“That strong dollar has contributed to a lot to the weak inflation we have in Canada and it takes a long time for the currency to work its way through that, Bow the currency is down to 90 cents and I expect it to go lower, we’ll see some inflation come from the currency,” he said.

While a negative in some ways, a lower loonie will help give a boost to Canadian exports. That could be enough to help expand the economy without the bank having the cut rates even lower than they already are.

“Suffice it to say that the bank is welcoming the weakening Canadian dollar with open arms, partly because it in turn reduces the pressure to consider trimming interest rates since the lower currency will begin to pump some life into inflation,” BMO economist Doug Porter said in a note.

CBC News Posted: Jan 22, 2014 9:38 AM ET

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