Interest Rates: Bank Of Canada Holds Rate Steady At 1 Per Cent

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MARK CARNEY
Bank of Canada announced its interest-rate decision Tuesday. | AP File

THE CANADIAN PRESS — OTTAWA - The Bank of Canada left its key overnight interest rate unchanged at one per cent Tuesday, as it said the influential U.S. economy has grown at a slower pace than expected.

However, the central bank noted that as the Canadian economy continues to grow, it will have to move to raise rates to keep inflation in check.

"To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be withdrawn, consistent with achieving the two per cent inflation target," the Bank of Canada said.

"Such reduction would need to be carefully considered."

The latest statement compared with the bank's May rate announcement that said "some of the considerable monetary policy stimulus currently in place will be eventually withdrawn."

Economists had widely expected the bank to leave rates unchanged — Canadian economic growth slowed in the second quarter, but the bank said it expects the economy to begin accelerating in the second half of the year.

Overall, the Bank of Canada expects the economy will expand by 2.8 per cent in 2011, compared with its call in April for 2.9 per cent growth. The outlook for 2012 and 2013 was unchanged at 2.6 per cent and 2.1 per cent respectively.

A full update on the central bank's outlook for the economy and inflation is expected when the Bank of Canada publishes its monetary policy report on Wednesday.

The latest rate decision comes amid a growing credit crisis in Europe and fiscal gridlock and sluggish economic growth in the United States, Canada's largest trading partner.

"The U.S. economy has grown at a slower pace than expected and continues to be restrained by the consolidation of household balance sheets and slow growth in employment," the central bank said.

"While growth in core Europe has been stronger than expected, necessary fiscal austerity measures in a number of countries will restrain growth over the projection horizon."

The central bank said its outlook assumes that authorities will be able to contain the European sovereign debt crisis, "although there are clear risks around this outcome."

As Europe and the United States continue to put up warning signs, the Canadian economy has appeared to be on track with three consecutive months of job growth and signs of inflation.

The Bank of Canada's latest business outlook survey found corporate Canada in a generally upbeat mood and looking to hire with 57 per cent of the firms surveyed expected to hire new workers over the next year compared with just four per cent of firms that expected to have fewer employees over the next 12 months.

Statistics Canada reported a net gain of 28,000 jobs for June, a stark contrast to a disappointing report of only 18,000 jobs added in the United States.

Canada's annual inflation rate also jumped to the highest level in eight years in May hitting 3.7 per cent on big increases in the price of gasoline. Core inflation — which excludes volatile items like energy and some kinds of food — increased to 1.8 per cent.

"Total CPI inflation is expected to remain above three per cent in the near term, largely reflecting temporary factors such as significantly higher food and energy prices. Core inflation is slightly firmer than anticipated, owing to temporary factors and to more persistent strength in the prices of some services," the Bank of Canada said.

"Core inflation is now expected to remain around two per cent over the projection horizon."

Statistics Canada is expected to report June inflation numbers on Friday.

The bank's overnight target rate affects the prime lending rate at Canada's big banks and in turn the rates for variable rate mortgages and lines of credit.

The Bank of Canada's next scheduled rate announcement is set for Sept. 7.

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