As expected by market practitioners, The Bank of Canada has held its benchmark overnight rate at one percent. This was the seventh consecutive meeting that the rate has remained unchanged.
The sovereign debt problems facing Europe and the political debate on the debt ceiling in the United States are the two main reasons for leaving interest rates unchanged. Despite these global challenges, Canada has very stimulative financial conditions and the growth in consumer borrowing remains strong.
The Bank also adjusted downward its growth forecast for 2011 to 2.8% while maintaining that the Canadian economy will grow by 2.6 percent in 2012 and 2.1 percent in 2013. The economy is expected to grow faster in the second half of this year, as the first half was restrained by the Japanese earthquake and high energy prices. The Bank’s preferred gauge of inflation is approaching the two percent target sooner than they expected. Having said that, the Bank is not in a hurry to raise rates aggressively but might begin its upward climb by the fall of this year.
The United States economy continues to grow at a sub standard pace due to the indebtedness of their consumers and a very weak labor market. This has held back Canadian exports. The Canadian dollar currently sits at $1.05, giving the Bank plenty of flexibility to remain on the sidelines as the high currency is doing much of the tightening for them