Signals potential interest rate hikes ahead
The Bank of Canada held its trend setting Bank rate at 1.25 per cent on April 12, 2011. This marks the fifth consecutive policy rate announcement for which interest rates have been kept on hold.
The Bank acknowledged broadening global inflationary pressures and that Canadian economic growth has come in stronger than it predicted in its January Monetary Policy Report (MPR). It also said its April MPR updates the Bank’s inflation outlook, with inflation in Canada now expected to rise to its two per cent inflation by mid-2012. This is two quarters earlier than the Bank predicted in its previous MPR.
While interest rates are widely expected to rise this year to keep inflation under wraps, language used in the April policy rate announcement may be interpreted by financial market economists as a signal that the Bank will resume raising interest rates at its next policy interest rate announcement on May 31, 2011.
However, the Bank said “the persistent strength of the Canadian dollar could create even greater headwinds for the Canadian economy, putting additional downward pressure on inflation through weaker-than-expected net exports and larger declines in import prices.” These downside risks to inflation give the Bank some latitude as to when it will resume raising interest rates, since it will take time to gauge the impact that a strong Canadian dollar will have on near-term economic growth.
The Bank said it still expects consumer spending to slow to a rate more broadly in line with after-tax income, but thinks it could be stronger than it previously predicted due to wealth from continued home price increases, the rebound in the stock market, higher prices for commodity exports, and lower import prices due to a stronger Canadian dollar.
By keeping its trend-setting policy interest rates where they are, interest rates remain very positive for Canadian economic growth. Moreover, the Bank reiterated its statement that “any further reduction in monetary policy stimulus would need to be carefully considered.” This suggests the Bank’s continued intention not to make any sudden moves on interest rates.
As of April 12, 2011, the advertised five-year lending rate stood at 5.69 per cent. This is up a quarter of a percentage point from 5.44 per cent on March 1st, when the Bank made its previous policy interest rate announcement.
The Bank will make its next scheduled rate announcement on May 31st, 2011