Surprise, surprise: Central Bank holds overnight rate at 1 per cent

By Vernon Clement Jones | 12/04/2011
In what may be the worst kept secret, the Bank of Canada today announced it will maintain its key overnight rate at 1 per cent, pointing to global economic challenges courtesy of the Japan disaster and the soaring Loonie’s drag on exports.

What’s more, there’s little indication the bank will move to adjust its key interest rate on May 31, the next review date. Tuesday’s report repeats the same cautious wording used in the March 1 rate decision, which preceded today’s announcement: “Any further reduction in monetary policy stimulus would need to be carefully considered.”

The bank is hinting that the overnight may go up later in the year, given its improved outlook for 2011. The bank has now raised the forecast by a half-percentage point, suggesting economic recovery is moving at a faster clip than expected.

That stepped-up performance continues to be challenged by the soaring Loonie, which has tamped down on global demand for Canadian exports, a key driver of economic growth.

“As in January, the bank expects business investment to continue to rise rapidly and the growth of consumer spending to evolve broadly in line with that of personal disposable income, although higher terms of trade and wealth are likely to support a slightly stronger profile for household expenditures than previously projected,” says the bank announcement. “In contrast, the improvement in net exports is expected to be further restrained by ongoing competitiveness challenges, which have been reinforced by the recent strength of the Canadian dollar.”

Tame global recovery -- especially stateside -- has also played a part in the bank’s decision to keep the overnight rate steady: “The global economic recovery is becoming more firmly entrenched and is expected to continue at a steady pace. In the United States, growth is solidifying, although consolidation of household and ultimately government balance sheets will limit the pace of the expansion.”

While European growth has strengthened, even in the face of ongoing sovereign debt and banking challenges, the Japan disaster “will severely affect its economic activity in the first half of this year and create short-term disruptions to supply chains in advanced economies,” says the bank report.

The Central Bank seems prepared to wait until its July review to start nudging its key rate upward, although it could move as early as May if Canadian business begins to replace the economic stimulus now being provided by the bank’s low interest rates.

“The bank expects business investment to continue to rise rapidly and the growth of consumer spending to evolve broadly in line with that of personable disposable income – although higher terms of trade and wealth are likely to support a slightly stronger profile” than previously expected, according to the bank.