OTTAWA — The growing U.S. economy will help Canada's export industry, though Canada will continue to have a worryingly low inflation rate for another couple of years, the Bank of Canada governor said Wednesday.
In response, the bank maintained its overnight interest rate at 1%.
In the past three months, the country's inflation rate moved further below the bank's 2% target, indicating the Canadian economy is not working at capacity and unemployment is still high.
While BoC governor Stephen Poloz reiterated low inflation offers more purchasing power, the downward pressure on prices is also a consequence of the fact that the country's export sector "hasn't shown the type of vigour that we expected to see by now. The last six months have disappointed us."
The bank predicts the U.S. economy will grow by 3% in 2014, compared with 1.9% in 2013, and therefore demand for Canada's exports should increase.
The declining Canadian dollar is also expected to help exports this year. The dollar fell below 91 cents on Wednesday morning after the bank's interest rate announcement.
Poloz said the positive economic outlook in the U.S. will "boost" business confidence, but the negative consequences of low inflation continue to put Canada's economy at risk.
He said that the low inflationary environment gives Canada less room to manipulate its currency should a major economic shock occur.
Led by Poloz since June, the central bank dropped a longstanding bias towards hiking interest rates last October. It has not changed its key rate since September 2010.
- with files from Reuters