Bank hikes interest rates but sees sluggish economic
The Bank of Canada today raised its trend-setting interest rate for the third consecutive time—to 1 per cent—but signaled this may be the last increase until the central bank sees signs of a durable recovery.
“Any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook,” bank governor Mark Carney wrote in a brief explanation of the decision.
The move means higher interest costs for some mortgage holders and consumer and business borrowers.
The bank said “economic activity in Canada was slightly softer in the second quarter” than it had expected and the economic recovery in Canada will be “slightly more gradual” than expected a few months ago. This largely reflects “a weaker profile for U.S. activity,” Carney said.
The Canadian economy expanded at a robust 5.8 per cent pace (on an annualized basis) in the January-through-March period but slipped to 2 per cent from April to June.
“The global economic recovery is proceeding but remains uneven, balancing strong activity in emerging market economies with weak growth in some advanced economies,” the bank observed.
“In the United States, the recovery in private demand is being held back by high unemployment and recent indicators suggest a more muted recovery in the near term.”
Still, looking ahead in Canada, the bank said “consumption growth is expected to remain solid and business investment to rise strongly” as a result of accommodative borrowing conditions.
In early 2009, Carney took the unusual step of announcing that he would hold the bank’s key overnight rate at 0.25 per cent for a year to help combat the recession. But, with the Canadian economy on the mend, he has been gradually raising the rate in recent months.
However, many analysts expect this to be the last upward move in interest rates by the bank for some time, perhaps until next year, unless business conditions rapidly improve.
In fact, economists were sharply divided over whether the bank, faced with a sputtering recovery in the vital United States market, would hike rates again today or take a breather to assess the economic trends.
But Carney pointed out today that, although monetary policy in Canada has tightened since April, financial conditions remain “exceptionally stimulative.”
“Since the start of this year, the (central) bank’s outlook for economic growth in 2011 has been too rosy,” TD Bank economist Craig Alexander responded.
Based on today’s decision, “the odds favour the Bank of Canada pausing for some time” before raising its key rate again, Alexander said. “TD Economics does not anticipate another tightening before March of next year.”
The next scheduled date for announcing the overnight rate target is Oct.19.
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