Bank of Canada leaves key interest rate unchanged

The Bank of Canada left its key overnight lending rate at 0.50 per cent on Wednesday, saying the domestic economy was adjusting largely as expected to the effects of low oil prices and other pressures. But in the U.S., the central bank appears ready to move rates higher.

U.S. Federal Reserve appears ready to hike rates, but Canada's central bank unlikely to follow

As expected, the Bank of Canada has left its key overnight lending rate unchanged at 0.50 per cent. (Canadian Press)

The Bank of Canada left its key overnight lending rate at 0.50 per cent on Wednesday, saying the domestic economy was adjusting largely as expected to the effects of low oil prices and other pressures.

Most economists had expected the central bank to stand pat on its trend-setting rate.

In a statement, the Bank of Canada said exports in non-resource areas were being helped by the ongoing U.S. recovery, a lower Canadian dollar, and the central bank's two interest rate cuts earlier this year.

But it noted that the resource sector was still struggling with low prices and major job losses. 

Total inflation as measured by the consumer price index remains near the bottom of its one- to three-per-cent target range, thanks to low energy prices, the bank said.

But it noted that business investment continues to be weighed down by spending cuts at resource companies. The bank also said U.S. consumer spending "has proven slightly less robust" than it expected.

In this country, the bank remains concerned about consumer debt levels. "Vulnerabilities in the household sector continue to edge higher," the bank said.

The interest rate announcement came one day after news that Canada's real gross domestic product grew at an annualized rate of 2.3 per cent in the three-month period ended in September, following two quarters of contraction. 

But that turnaround may be short-lived. The data also showed that the economy shrank in September by 0.5 per cent from the previous month, providing a weak hand-off to the fourth quarter.   

Unlikely to follow U.S.

Later this month, the U.S. Federal Reserve could begin raising its key overnight lending rate for the first time in almost a decade.  

But economists said a line in the Bank of Canada statement that "policy divergence [between the U.S. and Canada] is expected to remain a prominent theme" is a clear signal that the bank would not be following suit soon.

"This is likely a message to those who think that the Bank [of Canada] could be pressured to tighten as the Fed pushes rate higher," said BMO Capital Markets economist Benjamin Reitzes in a commentary.

"Governor [Stephen] Poloz is making it clear that even as the Fed hikes, Canadian rates will stay steady." 

TD economist Leslie Preston said she expects the Bank of Canada "to keep rates at their current low level until the middle of 2017."

The Bank of Canada's next pronouncement on interest rates comes on Jan. 20.


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