Bank of Canada holds interest rate at 1%

The Bank of Canada says it is holding its key lending rate at one per cent, citing worsened economic conditions since its last forecast, and signals it could maintain that holding pattern for some time.

Carney cites worsened economic conditions

The Bank of Canada said Tuesday it is holding its key lending rate at one per cent, citing worsened economic conditions since its last forecast, and signalled it could maintain that holding pattern for some time.

The central bank, which gave its last comprehensive forecast in October, said any further withdrawing of monetary stimulus should be carefully considered.

Household spending has been stronger than anticipated, but exports that support the manufacturing sector were weaker, it noted.

The Bank of Canada said the economic recovery slowdown is due to disappointing productivity gains and the strong loonie, which makes Canadian goods more expensive in foreign markets.

"This underlines a previously identified risk that a combination of disappointing productivity performance and persistent strength in the Canadian dollar could dampen the expected recovery of net exports," the central bank said in a release.

'Risks have increased'

It said the decision not to change rates means there will be no added monetary stimulus, which is consistent with achieving the two per cent inflation target.

However, "any further reduction in monetary policy stimulus would need to be carefully considered."

On a global basis, the bank said "the global economic recovery is proceeding largely as expected, although risks have increased."

"As anticipated, private domestic demand in the United States is picking up slowly, while growth in emerging-market economies has begun to ease to a more sustainable, but still robust, pace," it said.

The central bank has already raised the rate three times this year, 25 basis points each in June, July and September. But since the last announcement in October, when the bank left rates unchanged, Canada's economic picture has changed.

Data a factor

Late last week, Statistics Canada said the unemployment rate fell to its lowest level in almost two years, to 7.6 per cent in November, as the economy created 15,200 new positions.

Part-time work rose by 26,700, but there were 11,500 fewer full-time workers last month.

Analysts were expecting the creation of between 15,000 and 20,000 jobs. Economists view the lower-than-expected job creation as a sign the economy is still struggling to reclaim positions lost during the recession.

Meanwhile, data in the U.S. showed the jobless rate rose to 9.8 per cent, as the economy only produced 39,000 new jobs. Analysts were expecting about 150,000 jobs.

Earlier in the week, Statistics Canada said the country's gross domestic product rose by 0.3 per cent in the third quarter, down from a 0.6 per cent gain in the previous quarter. On a monthly basis, real GDP by industry declined by 0.1 per cent in September.

Bank has 'breathing room': economist

The agency said lower exports and lower investment in housing restrained GDP growth.

The country's current account deficit also widened to $17.5 billion in the third quarter.

Given the uncertainties in both the domestic and international outlooks, economists see the central bank maintaining its stance.

"At this juncture in time, hiking too soon can be more detrimental to the Canadian economy than keeping rates stimulative for a longer period of time," Diana Petramala, an economist at TD Economics, said in a release.

"And with inflationary pressures under wraps, we believe the Bank of Canada has some breathing room to remain on hold until July of 2011."