Bank of Canada

The Bank of Canada once again opted to hold its target for the overnight rate at 1 per cent this morning. Interest rates have been held constant for over two years, the longest such period since the 1950s.  The Bank somewhat tempered its bias for higher future interest rates, including a softer statement regarding the appropriateness of a gradual withdrawal of monetary stimulus as excess supply in the economy is absorbed. In a bit of a surprise, the Bank actually raised its forecast for the growth in the Canadian economy this year to 2.2 per cent, but kept its 2013 forecast at 2.3 per cent growth. The Bank judges that at that pace of growth, the Canadian economy will return to full capacity by the end of 2013.

It is our view that monetary policy at the Bank of Canada will continue to be constrained by external events in the global economy and household debt growth at home. While the Bank's preference for tighter policy is clear, it is difficult to make a case for higher interest rates when core inflation is below the Bank's 2 per cent target and already slow economic growth is threatened by global uncertainty. Therefore, we are forecasting that the Bank of Canada will hold its target overnight rate at 1 per cent until mid-to-late 2013 when, conditioned on an improved global economic outlook,  it may test the water with a 25 basis point rate increase.


Copyright BCREA reprinted with permission