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June 2, 2011

Bank of Canada holds target rate at one per cent

The Bank of Canada maintained its overnight target rate at 1.0% on May 31, 2011; a decision that was consistent with market expectations. The Bank of Canada has left the rate unchanged since September 8, 2010.

Bank of Canada governor Mark Carney indicated the global economic recovery is proceeding in line with expectations noted in the April Monetary Policy Report (MPR). In the United States, growth continues at a moderate pace as downward pressure remains, due to the ongoing consolidation of household balance sheets. Risks from the sovereign debt crisis in peripheral Europe are still elevated, although European economies have maintained momentum despite these challenges. The disaster that struck Japan in March is beginning to affect supply chains in advanced economies and is likely to continue to affect global growth in the current quarter. Meanwhile, commodity prices have softened recently but are expected to remain at elevated levels due to continued demand from emerging market economies.

Overall, financial conditions remain very simulative in support of the global economy. It is important to note that the Bank did introduce the prospect of reducing monetary stimulus going forward if current favourable economic conditions persist.

Gross domestic product (GDP)

Economic growth in Canada continues as the economy expanded at an annual rate of 3.9% in the first quarter of 2011, following expansion of 3.1% in the last quarter of 2010.

According to the Bank, two key components to the economic recovery are business spending and net exports. Business spending showed continued strength in the first quarter, expanding for the fifth consecutive quarter. However, a strong Canadian dollar weighed on net exports once again and will likely continue to be a drag on the economy in the current quarter. Government and household expenditures represented a relatively smaller contribution to economic growth throughout the first quarter.

Going forward, the Bank expects a continued increase in business investment and consumer spending to remain in line with personal disposable income. The most recent Bank of Canada forecasts project the Canadian economy to expand 2.9 per cent in 2011 and 2.6 per cent in 2012.

Inflation

The bank expects headline inflation to remain elevated in the near term due to high energy prices and changes in provincial indirect taxes, with total Consumer Price Index (CPI) inflation staying above three per cent. Upside risks to inflation include greater than expected increases in household borrowing and spending in Canada. However, continued strength of the Canadian dollar could put downward pressure on inflation, keeping import prices subdued and negatively affecting exports. The Bank forecasts total and core inflation to converge to two per cent by the middle of next year, well within the Bank’s target range of 1 to 3 per cent.

Canadian currency

Along with softer commodity prices, the Canadian dollar has retreated to a closing rate of 1.0234 USD on May 30, 2011, having reached a recent high of 1.0581 USD on April 29, 2011.

Next announcement

The next scheduled date for announcing the overnight rate target is July 19, 2011.

Maintain a long-term focus

Monitoring the Bank of Canada’s interest rate announcements is just one of the many economic factors that we follow at MD to ensure we make the right decisions for your investments. While this interest rate announcement may have short-term impact on certain areas of the economy or markets, we encourage you to remain focused on your long-term financial plan.

Bank of Canada press release