Carney keeps rate steady at 1%

Bank of Canada Governor Mark Carney held Canada's benchmark interest rate steady at one per cent on Wednesday.
Bank of Canada Governor Mark Carney held the benchmark interest rate steady at one per cent. (Sean Kilpatrick/CP)

Bank of Canada Governor Mark Carney held Canada's benchmark interest rate steady at one per cent on Wednesday.

It was the eighth consecutive time the central bank has opted to stand pat. The target for the overnight rate was raised to one per cent in September 2010.

"The global economic outlook has deteriorated in recent weeks," the bank said in a release Wednesday morning. "Canadian economic growth stalled in the second quarter."

The decision to hold rates steady was in line with what economists had been expecting. But as recently as last spring, expectations were that the bank would begin to hike rates at some point in the summer of 2011.

That was before the economic outlook in Europe and the United States worsened, tying the central banks hands somewhat. Some economists now think there will be a rate cut before another hike.

"They might have to cut, but I'm not expecting anything more than standing still for the next few meetings," said Ian Nakamoto, research director at Toronto investment firm MacDougall, MacDougall, & MacTier.

The bank makes its policy decisions with a view to keeping inflation at two per cent over the medium term.

"In light of slowing global economic momentum and heightened financial uncertainty, the need to withdraw monetary policy stimulus has diminished," the bank said.

That's the central bank's way of saying it's no longer as worried that low interest rates will trigger inflation, suggesting there's no rush to raise just yet.

The bank still thinks growth in Canada's economy will return in the second half of 2011. But the economic problems in Europe and the United States are going to require "additional significant initiatives by European authorities" — a hint that those places can expect a low rate environment to continue.

Economists now expect the bank will stay on the sidelines for the time being. "There is nothing in this statement that would support the cut camp, now or in future," Scotiabank economist Derek Holt said.

Scotia expects the central bank to hold steady until the third quarter of 2012 before hiking the rate toward 2 per cent.

"The statement was very dovish ... but the Bank of Canada certainly wasn't signalling their intent to ease monetary policy at this point in time," said TD Bank chief economist Craig Alexander.

"I think the bar is set extraordinarily high for the Bank of Canada to actually ease policy."

Absent a domestic economic contraction, Carney is unlikely to cut what is already an interest rate below inflation, Alexander said.

The Canadian dollar rose slightly Wednesday and was trading up about one-fifth of a cent at 101.22 US near noon.

Investors welcomed the news, with the S&P/TSX Composite Index up 165 points to 12,684.

With files from The Canadian Press