Bank of Canada puts off rate hikes
Central bank suggests rate hikes are coming eventually
The Bank of Canada kept its benchmark interest rate steady at one per cent again but hinted that when it chooses to change it is more likely to raise than to lower it.
Last week, data showed Canada's economy only expanded by 0.6 per cent in the fourth quarter, the slowest pace seen since the end of the recession.
In a policy statement Wednesday, Canada's central bank said it expects economic growth to pick up the pace through 2013, driven by a recovery in exports and slightly higher domestic spending.
If that happens, the bank will eventually move to raise its benchmark interest rate, the so-called "target for the overnight rate" higher from the one per cent level it has been at for more than two years.
Loonie loses ground
"The considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required," the bank said.
That's the bank's way of saying it expects the economy to improve to the point that it won't have to keep rates low to lubricate the economy, so it can start to raise them at some point.
The bank's rate is the one that Canada's consumer banks use in setting their rates to give to savers and borrowers on the retail level for things like mortgages and savings accounts.
But exactly what Bank of Canada means by "a period of time" remains to be seen.
The loonie lost more than three-quarters of a cent in reaction to the news, changing hands at 96.8 cents US at midmorning. That weakness in the Canadian dollar is a suggestion that the currency market was hoping for a stronger move towards a rate hike than the central bank gave it Wednesday.
In the past, outgoing bank governor Mark Carney — who leaves his post in June — said he was worried that low rates were luring Canadians into taking on debt they could not afford to service once interest rates rose.
In January, the bank had noted the beginnings of restraint in household spending, but in the latest statement to bank sounds more certain, stating "residential investment is expected to moderate further."
It adds that the 165 per cent record high household debt-to-income ratio is stabilizing at current levels.
"I think the bank made it just a little more explicit that they see rates going nowhere any time soon. I think this pretty well locks in the view that there won't be any rate hikes in 2013," said Doug Porter, chief economist with BMO Capital Markets.
With files from The Canadian Press