Local Economy

Bank of Canada stands pat as outlook darkens

The Bank of Canada has once again decided to keep its benchmark interest rate unchanged at 1 per cent.

Central bank's key interest rate kept at 1% with economic growth slowing

Interest rate unchanged

9 years ago
Duration 4:05
The Bank of Canada responds to a dimming economic outlook

The Bank of Canada hinted Wednesday that Canada's record low interest rates are going to stay right where they are for a long while yet.

In its latest policy decision, Canada's central bank kept its benchmark interest rate, what's known as the target for the overnight rate, steady at one per cent on Wednesday.

That's the rate that retail banks base their lending and saving rates for consumers on, and it's been kept at that level since September 2010.

Wednesday's policy decision is the next-to-last one for Mark Carney as head of the bank before he leaves to London to head up the Bank of England in June. 

'The next move is likely to be up.'—Bank of Canada governor Mark Carney

The Carney-led Bank of Canada has now kept the rate steady at one per cent for 21 consecutive policy meetings.

Despite the lack of change, the bank suggested its outlook for the Canadian economy is actually a bit worse now than previously — a sign suggesting the bank is in no rush to raise rates and slow down growth.

"A material degree of slack has re-emerged in the Canadian economy," the bank said in a statement.

"Considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required."

In its report released Wednesday, the Bank of Canada said that the Canadian economy is expected to grow by 1.5 per cent in 2013 — less than the two per cent that was forecast in its January report.

The economy is expected to pick up at 2.8 per cent growth in 2014 and 2.7 per cent growth in 2015, before reaching "full capacity" in mid-2015.

"Following a weak second half in 2012, growth in Canada is predicted to regain some momentum in 2013 as net exports pick up and business investment returns to more solid growth," Carney said in a prepared statement Wednesday.

He added that consumer spending is expected to grow at a modest pace, while housing is set to decline further.

Although the interest rate remains unchanged for now, Carney said that it is likely to rise at some point in order to achieve the bank’s target inflation rate of two per cent.

"After a period based on several factors which we list [including the evolution of the housing market and the evolution of household balances], the next move is likely to be up," Carney said.

Scotiabank economist Derek Holt told The Canadian Press that the country likely won't be hit with higher interest rates until 2015.

The tell-tale sign, he said, is that the bank pushed back the closure of the output gap to mid-2015. It had predicted in January that the economy would reach full capacity by the second half of 2014.

"That's a very strong signal that they are not in hike mode until at least 2015, and even then, it's not as if you get worried about inflation pressures instantly once you close off spare capacity — you need to get the economy into material excess demand and that can happen well after that," Holt said.

The Canadian dollar closed down Wednesday following the forecast, falling 0.58 of a cent to 97.41 cents US.

With files from Canadian Press