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October 19, 2010

Bank of Canada holds target rate at one per cent

On October 19, 2010, the Bank of Canada announced that it is maintaining the target for the overnight rate at 1.0%. This announcement is in line with expectations prior to the news release. The Bank had increased rates three consecutive times since June 2010, but now says a more modest economic growth profile precludes additional tightening.

The Bank’s Governor, Mark Carney, said that Canada’s recovery will be more gradual than expected, the rebound in the U.S. economy will be weaker than expected, and the global turnaround is entering a new phase. The Bank expects Canadian economic growth to be slower than projected in the July Monetary Policy Report (MPR). Growth in 2010 is now expected to be 3.0%, 2.3% in 2011, and 2.6% in 2012. This growth profile reflects a more gradual global recovery and a more subdued profile for household spending.

Gross domestic product

The Bank also expects a shift in the components of gross domestic product (GDP) that will lead economic growth in Canada. Today’s statement suggested a shift to business investment and net exports from government and household expenditures as the drivers of future GDP growth.

The Bank also advised that "any further reduction in monetary policy stimulus would need to be carefully considered."

Inflation

The level of inflation in Canada has been lower than the Bank’s projection in July. According to the most recent announcement, the output gap is larger than had been expected and will not return to full capacity until the end of 2012. In July, the Bank had projected that the gap would close at the beginning of 2012. Total CPI and core inflation are not expected to meet the 2.0% target until the end of 2012.

Canadian currency

On the news of the announcement, the Canadian dollar depreciated versus the U.S. dollar.

According to a survey conducted by Bloomberg News, the Bank’s announcement had been widely anticipated. The next scheduled date for announcing the overnight rate target is December 7, 2010.

Bank of Canada press release: www.bankofcanada.ca/en/fixed-dates/2010/rate_191010.html