NEWS

Bank of Canada leaves key interest rate unchanged

06/04/2014 10:11 EDT | Updated 08/04/2014 05:59 EDT
The Bank of Canada left its benchmark interest rate unchanged at one per cent today.

An unchanged rate means governor Stephen Poloz does not believe the Canadian economy is strong enough to withstand higher interest rates, despite lingering concern about high consumer debt and rising housing prices.

Poloz is not scheduled to discuss his decision publicly on Wednesday, but the analysis accompanying his announcement notes that inflation is approaching the two per cent target rate earlier than anticipated.

The loonie was down 0.29 of a cent to 91.37 cents US as the central bank signalled it is in no rush to raise rates.

The benchmark overnight rate is used by retail banks to set rates for savers and borrowers, though the range of consumer rates may vary depending on bond yields.

The rate has been a one per cent for more than three years, dating back to September 2010, the longest stretch of level rates in Canadian history.

Poloz is dealing with a mixed bag of economic results, including exports that have not yet picked up as quickly as anticipated and an unemployment rate of 7 per cent, with evidence of many long-term unemployed.

In March, Poloz reiterated a growth rate of 2.5 per cent this year for the Canadian economy, but told a business audience that slow growth is the new norm for developed economies.

Last month it noted only 1.2 per cent GDP growth rate in the first quarter, but Poloz's note this morning attributed that to "severe weather and supply constraints."

Exports tumble

On Wednesday, Statistics Canada reported that Canadian exports tumbled by 1.8 per cent in April, a surprising result given the thawing of the economy that was thought to have happened after a long winter. The country is posting a trade deficit of $638 million.

But the Bank of Canada seemed optimistic about a turnaround.

"The ingredients for a pickup in exports remain in place, including the lower Canadian dollar and an anticipated strengthening of foreign demand. Improved corporate profits, especially in exchange rate-sensitive sectors, should also support higher business investment in the coming quarters," it said.

Canada's economy is unlikely to take off until the U.S. makes a decisive turnaround. That could boost Canadian exports and put more people back to work.

Also, there is unlikely to be pressure on Canadian interest rates until the U.S. Federal Reserve winds down its quantitative easing program later this year.

Fed chair Janet Yellen has said it will be a “considerable period” after the Fed stops buying U.S. bonds before she hikes interest rates.

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