The Bank of Canada left its key lending rate unchanged Tuesday at 4.25 per cent and lowered its economic forecast.
It’s the third time in a row the central bank has left rates on hold as inflation quickens in Alberta, but remains muted in the rest of Canada. For the first time, the central bank said it expects core inflation to creep above its 2-per-cent target over the near term.
Economists said the statement suggests the central bank won’t likely budge on the interest-rate front any time soon.
“Although the bank did, indeed, lower its forecast for economic growth, there is not even a whiff of potential rate cuts in its statement,” said Marc Lévesque, chief strategist at TD Securities Inc., in a note. “The bank is clearly still in wait-and-see mode.”
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While domestic demand continues to be robust, economic growth “over the second and third quarters of 2006 has been weaker than expected, largely because of weaker net exports,” the bank said, adding that labour productivity growth has also been lower than expected.
“The current level of the target for the overnight rate is judged at this time to be consistent with achieving the inflation target over the medium term,” the bank said.
A weakening U.S. economy has curbed the near-term prospects for Canadian exports and growth, the central bank said. It now expects Canada’s economy to grow 2.8 per cent this year, from a previous forecast of 3.2 per cent. It sees growth of 2.5 per cent in 2007, and 2.8 per cent the year after that.
The bank said the Canadian economy is still operating “just above” its production capacity.
Risks in its projections are now greater than they were in the central bank’s last report in July. The main risks of an over-heated economy are the momentum in household spending and housing prices.
The main risk of a slowdown is that the U.S. economy could ease more sharply than expected, the bank said, leading to lower demand for Canadian exports.
The bank also revised its stance on inflation in the short term. Core inflation is expected to move “slightly” above 2 per cent in coming months, and return to 2 per cent by the middle of 2007.
Total inflation, which includes the temporary impact of the GST reduction, will likely average about 1.5 per cent through to the second quarter of 2007, before returning to the 2-per-cent target and remaining there through to the end of 2008, the bank said. The risks to its inflation projections are “roughly balanced,” according to the bank.
Economists had expected rates to stay unchanged today. Several predict the central bank will trim interest rates in the first half of next year amid tepid economic growth.
The target for the overnight rate dictates to major banks the average lending rate the Bank of Canada wants to see in the marketplace when they lend each other money for one day, or “overnight.”
The overnight rate influences everything from mortgage rates and credit card rates to the Canadian currency. At 4.25 per cent, the overnight rate is the highest since 2001.
Following the announcement, the Canadian dollar was trading 0.04 of a cent lower at 87.9 cents ( U.S.).
The central bank will provide more details on its views Thursday, with the release of its monetary policy report.