Bank of Canada holds line on interest rates

The Bank of Canada gave the market a surprise on Tuesday as it left a key interest rate unchanged amid inflation worries.

The central bank left the overnight rate — what the country's big banks charge each other for overnight loans — steady at three per cent.

Many economists had forecast a cut of a quarter of a percentage point.

"The Bank of Canada proved today that it has a mind of its own," said Beata Caranci, the director of economic forecasting at TD Bank.

The Canadian dollar shed 0.08 of a cent to settle at 97.81cents US.

The Bank of Canada is currently grappling with mixed signals — a slowing economy and inflation tensions.

The country's GDP unexpectedly contracted by 0.3 per cent annualized in the first quarter. Housing is cooling, last month's job-creation figures were the lowest this year, and a couple of recent surveys indicate consumer confidence in Canada has fallen to a six-year low.

On the other hand, inflation pressures are building, with oil hitting a record $139 US a barrel last week. Food prices also took a big jump in April.

In the commentary accompanying its latest rate decision, the Bank of Canada said that while U.S. economic weakness "has not been favourable for demand for Canadian goods and services, overall, global growth has been stronger and commodity prices have been sharply higher than expected," the bank said.

"At the same time, many of the downside risks to inflation identified in the April [Monetary Policy Report] have eased, while the evolution of credit conditions has been in line with expectations," the bank said.

If current trends in energy prices continue, inflation is expected to rise above three per cent later this year, the bank said, adding it believes the current level of interest rates are enough to help bring inflation back down to its two-per-cent target.

No changes seen in short term

Dawn Desjardins, assistant chief economist at Royal Bank, said the Bank of Canada is unlikely to switch to a tightening interest rate policy stance in the near term, especially with the economy underperforming this year.

"The bank’s concluding statement that 'there continue to be important downside and upside risks to inflation in Canada, which the bank will monitor closely' implies no policy action anytime soon," Desjardins said.

The Bank of Canada has slashed its key lending rate by 1.5 percentage points since early December. At its last policy meeting in April, the central bank cut its overnight rate by half a percentage point.

The bank's next interest rate decision is set for July 15.

CBC News June 10, 2008