BUSINESS

Standing pat: Bank of Canada keeps its trendsetting interest rate at 0.75%

03/04/2015 10:02 EST | Updated 05/04/2015 05:59 EDT
OTTAWA - The Bank of Canada maintained its key interest rate Wednesday as it credited global economic conditions and its January cut for helping the country weather the bruising oil slump.

The central bank's latest policy announcement, which kept the overnight rate target at 0.75 per cent, also contained a slightly sunnier outlook, leaving many analysts with the impression there won't be any other reductions any time soon.

It was the bank's first policy decision since January when governor Stephen Poloz stunned markets by lowering the rate a quarter of a percentage point from one per cent. At the time, Poloz called it a necessary insurance because lower oil prices would be "unambiguously negative" for the economy.

Since then, the bank said the evolution of oil prices as well as the global and Canadian economies had largely unfolded in line with its projections.

It underlined several areas where conditions landed close to its assumptions: the stronger performance in non-energy exports and investment, the economic growth reading for the final three months of 2014 and core inflation near its two per cent target.

"Financial conditions in Canada have eased materially since January, in response to the bank's recent monetary policy action and to global financial developments," the bank said in a statement.

"We judge that the current degree of monetary policy stimulus is still appropriate."

The bank also said the bulk of the oil slump's negative effects will strike the Canadian economy in the first half of 2015 — and could be more front loaded than it had predicted.

It doesn't expect the weakened Canadian dollar to hurt, either.

The bank said the loonie would help offset the effect of the oil-price shock and lift investment and exports in non-energy sectors. The depleted dollar is due in part to the low interest rate and cheaper oil prices.

"In light of these developments, the risks around the inflation profile are now more balanced and financial stability risks are evolving as expected," the bank said.

Most experts had anticipated the bank's decision to hold the line Wednesday, but only a couple of weeks ago, many of them had predicted a second cut. Those expectations changed over the past week after fresh data releases and remarks by Poloz led them to believe the bank would stand pat.

Last week, Poloz said the cut in January bought the bank extra time to assess the impact of oil's decline.

Some economists expected the bank to introduce a cut either at its next scheduled rate announcement on April 15, when it will also release its spring monetary policy report, or at the following policy meeting in July.

But the wording in the report Wednesday led to some reconsideration.

BMO chief economist Douglas Porter estimated there's now probably less than a 50 per cent chance a rate cut is on the horizon.

"I took away the message that they're probably done unless there's a serious downside surprise to the economy in the next few months," Porter said.

The bank, he said, backed up that position by saying the negatives of low oil prices might be more front loaded than expected.

Porter said it likely means the bank is expecting a lot of oil-related weakness ahead, but feels it's already done enough to counter it.

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