NEWS

Bank of Canada holds rate steady at 1%

01/17/2012 09:14 EST | Updated 03/18/2012 05:12 EDT

The Bank of Canada held its target for the overnight interest rate steady at 1.0 per cent on Tuesday, the 11th consecutive time it has chosen to do so.

"With the target interest rate near historic lows and the financial system functioning well, there is considerable monetary policy stimulus in Canada," the bank said in a statement accompanying the decision.

The bank lifted its benchmark rate to its current level in September 2010.

The overnight rate is the interest rate at which major financial institutions borrow and lend one-day (or "overnight") funds among themselves. The bank sets a target level for that rate.

Changes to the target influence other rates, such as consumer loans, mortgages and the value of the Canadian dollar.

The central bank says economic conditions around the world are deteriorating, but not necessarily for Canada.

The bank says Canada performed better than expected in the second half of 2011, which will result in the economy returning to normal sooner than the bank had last forecast, in October.

But the output gap in the economy will not be fully closed until the third quarter of 2013, the bank says.

As for growth, the bank says the economy expanded by 2.4 per cent in 2011 — three notches better than its earliest forecast — but will slow to 2.0 per cent this year before picking up steam to 2.8 per cent in 2013.

"The bank's decision on interest rates did not come as a surprise to financial markets," RBC economist Dawn Desjardins said. "More attention [was] paid to the change to the growth forecasts than to the rate decision itself."

Those new predictions match private sector forecasts suggesting the European debt situation is dire and the global economy is cooling. But Canada continues to fare comparatively better.

That takes pressure off the central bank to move one way or the other — either cut rates to stimulate the economy further, or hike them to return to a more typical level.

"Our view is that conditions will be conducive to the slow unwinding of stimulus starting late this year and continuing into 2013," Desjardins said.

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