Bank of Canada keeps overnight interest rate at 1%

The Bank of Canada building is pictured in Ottawa in this file photo taken July 19, 2011....

The Bank of Canada building is pictured in Ottawa in this file photo taken July 19, 2011. REUTERS/Chris Wattie/Files

Randall Palmer and David Ljunggren, REUTERS

, Last Updated: 11:43 AM ET

OTTAWA - Shrugging off a recent surge in inflation as temporary, the Bank of Canada held its key overnight interest rate at 1% on Wednesday, as expected, and insisted it could just as easily cut rates as raise them.

In the statement that accompanied the rate decision, the bank, however, did omit language it had used in its June rate statement that said the downside risks to its inflation outlook remain important, an acknowledgement that overall inflation hit 2.3% in May and that core inflation was also higher than expected.

It said the risk of a downward drift in inflation expectations has diminished with inflation close to the bank's 2% target.

The overall tenor of the central banks' statement, however, was to emphasize excess capacity in the economy and the need for continued monetary policy stimulation.

"The bank does not expect the recent momentum in monthly inflation to persist," it said in the quarterly Monetary Policy Report it released along with the rate decision.

"The bank's judgment is that underlying inflation pressures remain muted, given the persistent slack in the economy and continued intense competition in the retail sector."

Recent higher inflation has resulted from higher energy prices, the fall in the Canadian dollar and sector-specific shocks such as costlier meat, "rather than due to any change in domestic economic fundamentals," the bank said.

Demonstrating its disappointment in economic growth, it pushed back yet again, to mid-2016, its expectations for when the economy would reach full capacity and when core inflation would rise to its 2% target.

And it said that total inflation, which hit 2.3% in May, would dip back below 2% in the second quarter of 2015 and rise to the target again only in the first quarter of 2016.

"The bank is neutral with respect to the timing and direction of the next change to the policy rate...," it said.

The bank said it attaches greater weight to downside risks to inflation when the current level is very low and less weight when it is higher.

Many market analysts had expected bank Governor Stephen Poloz to tone down the stress he has put on the bank's concern about low inflation. They had also expected him to try not to lend any support to the partial recovery of the Canadian dollar recently from the weak levels of earlier this year.

The report had numerous references to the lower Canadian dollar. It said, for example, that the level of the currency had reversed a small portion of the past deterioration in Canada's competitiveness, and it said that, combined with strengthening foreign activity, the lower Canadian dollar should support moderate export growth.

Markets marked down the Canadian dollar in response to the Bank of Canada report.

"The statement reinforced the bank's dovishly neutral stance by playing up the downside growth risks," said Sal Guatieri, senior economist at BMO Capital Markets.

"The bottom line is, unless the Canadian dollar weakens and the U.S. economy strengthens, Canada's economy probably won't meet the Bank of Canada's forecast."

The bank referred to "serial disappointment" with global growth over the past several years, but it continued to project gathering global momentum as headwinds abate.

 


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