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December 6, 2011

Bank of Canada maintains a target rate of one per cent

On December 6, 2011, Canada’s central bank once again kept its target for the overnight rate at 1.0%. The rate has remained the same since September 8, 2010, when it was increased by 0.25%.

The Bank indicated that global financial conditions had deteriorated since its October Monetary Policy Report due to a worsening of the debt crisis in Europe, and cited uncertainty around the global economic outlook as rationale for its decision to maintain the overnight rate. The Bank now expects a deeper than anticipated recession in Europe as a result of the austerity measures and structural reforms necessary to offset unsustainable deficits and debt levels.

Within the United States, economic data has been better than expected recently, although the Bank of Canada continues to see household deleveraging, fiscal consolidation and the impact of a possible recession in Europe weighing on growth. Outside of North America, China and other emerging markets continue to grow at a rapid pace, although a slowing global economy and lagged effects from prior monetary tightening have slowed growth to a more sustainable pace.

Overall, the Bank projected a dovish tone in the announcement, potentially laying the groundwork for additional monetary stimulus if financial conditions continue to deteriorate.

Gross domestic product (GDP)

During the announcement, the Bank indicated that recent economic indicators in Canada point to better than expected growth for the second half of the year. Business investment remains solid and households continue to spend in support of the economy. The Bank did note that weaker external conditions will likely weigh on growth going forward, and that the persistently high Canadian dollar continues to affect the competitiveness of Canadian exporters.

According to the October Monetary Policy Report, the Bank projects that the economy will expand by 2.1 per cent in 2011, 1.9 per cent in 2012 and 2.9 per cent in 2013.

Inflation

Despite headline inflation data exceeding expectations recently, the Bank anticipates a decline in the inflation rate as food and energy price pressures recede and excess supply remains in the economy. The Bank also projects softer core inflation, as the output gap is expected to persist well into 2013.

Canadian currency

The decision to maintain interest rates had little impact on the Canadian currency, as the loonie rose a modest 0.5% to $0.9878USD as of 12:50 P.M on December 6, 2011.

Next announcement

The next scheduled date for announcing the overnight rate target is January 17, 2012.

Bank of Canada press release