Bank of Canada holds key interest rate steady at 0.5%

The Bank of Canada has maintained its benchmark interest rate at 0.5 per cent.

Central bank cut rate twice in 2015 in an attempt to boost the economy

Bank of Canada Governor Stephen Poloz twice cut the central bank's benchmark interest rate last year in an attempt to stimulate the economy. (Chris Wattie/Reuters)

The Bank of Canada today maintained its benchmark interest rate at 0.5 per cent.

The bank's rate is officially called the "target for the overnight rate." Technically, it only governs the rate that retail banks charge each other for short-term loans, but has a strong impact on the rates that Canadians get from their lending institutions when they save or borrow money.

The central bank cut its rate twice last year in an attempt to stimulate the economy.

We wouldn't rule out another rate cut in March or April at the latest- David Madani, Capital Economics

Headed into the decision, economists were evenly split as to whether the bank would cut again or stand pat. The Canadian dollar jumped about half a cent on the rate news — a sign that investors were worried about a rate cut, and priced it into the value of the currency. 

When the central bank didn't cut the key lending rate, it marked a vote of confidence in the loonie, which rose to 68.89 cents US. But within an hour of the rate announcement, the loonie was back in the red at 68.63 cents US.

It finished the day up again at 69.03 cents US, as traders absorbed the news that the central bank sees modest growth ahead. 

The bank opted to stand on the sideline in part because the Canadian economy, while struggling, is still showing signs of a slow rebound later this year. The bank expects Canada's economy to grow by 1.5 per cent this year and 2.5 per cent in 2017. 

"The dynamics of the global economy are broadly as anticipated," the bank said in a statement. "The bank … judges that the current stance of monetary policy is appropriate, and the target for the overnight rate remains at 0.5 per cent."

David Madani, an economist with Capital Economics in Toronto, was among those who was expecting a rate cut, and said Wednesday he still thinks there will be one sooner rather than later.

"We think the economy will be lucky to grow by one per cent [this year]," he said. "Accordingly, we wouldn't rule out another rate cut in March or April at the latest."

As to why the bank opted to stand pat, however, he suspects the bank may be reluctant to give any more stimulus until the federal budget comes out, since Ottawa is widely expected to flood the economy with infrastructure spending.

"[The bank] isn't sure about to what expect from the upcoming federal stimulus budget and prefers to wait," he said. " Or, maybe, the bank knows something that nobody else does and can't reveal it."

Bank of Montreal economist Doug Porter agrees with that theory, noting one line from the bank's monetary policy report (MPR) which was released with the interest rate decision.

"The bank has not yet incorporated the positive impact of fiscal measures expected in the next federal budget," Porter quotes the bank as saying "It appears that they do want to wait to see exactly what is in this year's budget before making a move," he says.

Among the findings of the MPR are that the bank now expects a 72-cent loonie for the foreseeable future. In October, the last time the bank put out an MPR, that was 76 cents. 

The bank also isn't banking on a recovery in oil prices, saying it "assumes that oil prices will remain near their recent levels," which means $37 US for WTI and about the same for Brent.

Bank of Canada governor Stephen Poloz will speak to the media at 11:15 a.m. ET.

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