Bank of Canada keeps benchmark rate at 0.5%

The Bank of Canada has opted not to lower or raise its benchmark interest rate, choosing to keep it at 0.5 per cent.

Central bank has cut its target for the overnight rate twice this year, most recently in July

Canada's central bank has cut its benchmark interest rate twice this year to spur the economy, but opted to stand pat at its latest policy meeting. (Chris Wattie/Reuters)

The Bank of Canada has opted not to lower or raise its benchmark interest rate, choosing to keep it at 0.5 per cent.

Economists had been expecting the bank to keep its trend-setting target for the overnight rate where it is now. A few believe, however, that another cut might be possible later in the year unless the economic picture improves.

Last month, Statistics Canada put out gross domestic product data showing the Canadian economy shrank for the first two quarters of the year, meeting the bar of what is considered to be a recession.

After sitting on the sidelines for more than four years, the bank has moved to cut its benchmark interest rate twice this year — once in January and again in July. The goal of those cuts was to stimulate the economy by making it cheaper to borrow.

The goal was to encourage businesses to borrow to invest and expand, which would provide Canada's economy with a much-needed shot in the arm after the oil price lost more than half of its value in the past year.

Slow turnaround

The bank's interest rate announcement Wednesday suggests the central bank thinks its two previous cuts might have been enough to achieve that goal.

"The stimulative effects of previous monetary policy actions are working their way through the Canadian economy," the bank said in a statement Wednesday.

Despite the shrinking GDP, other economic indicators suggest that Canada's economy is waking from its slumber.

Canada has added more than 100,000 jobs this year, and exports — especially of things that aren't energy — are slowly rising again.

"Economic activity continues to be underpinned by solid household spending and a firm recovery in the United States, with particular strength in the sectors of the U.S. economy that are important for Canadian exports," the bank said.

'The tone seemed more optimistic than originally expected.- Rahim Madhavji, currency expert

Economists weren't surprised by the decision, noting that the bank has been saying for a while that it was assuming a slight recession to start this year, followed by modest growth, after that.

"In recent weeks, the economy's performance has been unfolding in line with these expectations," TD Bank economist Brian DePratto said.

"The bank's decision to leave rates unchanged was not surprising," he added. That explains why the news had little impact on the loonie, which went from slightly down on the day to inching up a tenth of a cent to 75.83 cents US after the news came out.

At least one bank watcher thought the interest rate news, all in all, was pretty encouraging.

"There was no mention of a possible further rate cut and the tone seemed more optimistic than originally expected," currency expert Rahim Madhavji of Knightsbridge FX said.


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