Interest rate stays at 1%, announces Bank of Canada

The Bank of Canada is keeping its trendsetting interest rate anchored at one per cent for the remainder of the year and sending a message that it still believes the cost of borrowing in Canada will go up at some point in the future.

The decision by the central bank’s policy setting panel was in line with the expectations of markets and economists, who had given only low odds to governor Mark Carney removing a mild bias towards raising rates sometime.

Canada’s dollar gained strength after the announcement. It was up 0.19 of a cent to 100.7 cents US — slightly higher than just prior to the central bank’s announcement.

The bank’s statement Tuesday suggests it is looking through the disappointing third quarter result as a temporary aberration.

Last week, Statistics Canada reported the country’s gross domestic product output had slowed to 0.6 per cent — about half what the bank had predicted in October, and the weakest result in more than a year.

The bank’s statement Tuesday said that “economic activity in the third quarter was weak, owing in part to transitory disruptions in the energy sector” — referring to some maintenance shutdowns.

“Although underlying momentum appears slightly softer than previously anticipated, the pace of economic growth is expected to pick up through 2013. The expansion is expected to be driven mainly by growth in consumption and business investment, reflecting very stimulative domestic financial conditions.”

Tying improved conditions to 2013 suggests governor Carney, who has announced his intention to step down in June to take charge of the Bank of England, now realizes the economy is unlikely to live up to his 2.5 per cent hopes in the current fourth quarter as well.

In a bit of a surprise, Carney says he is not as yet convinced the recent cooling in housing activity in Canada, and slowdown in credit accumulation, represents a fundamental shift.

On Monday, Finance Minister Jim Flaherty said he was pleased housing was moderating and that Canadians were starting to pay off debt, a shift in the credit and mortgage market he attributed in part to his decision to tighten borrowing rules in July.

Carney says, however: “It is too early … to determine whether the moderation in housing activity and credit will be sustained.”

That is likely because the bank expects to keep interest rates, and as a result borrowing costs, at historic lows for likely another year.

Part of what has Carney in a holding pattern, both in terms of rates and his language, is that he does not know the outcome of the so-called fiscal cliff negotiations in Washington. Canadian policy-makers say if no deal is reached in the next month to extend tax cuts and program spending, the U.S. economy could take a battering amounting to about four percentage GDP points next year, sufficient to send it and likely Canada back into recession.

As it is, Carney said the uncertainty over whether Washington will be able to avoid figuratively going over the cliff is already impacting the economy.

Otherwise, not much has changed in the past month or so, the bank says. Europe is still in recession, the U.S. is recovering but at a gradual pace and Chinese growth appears to be stabilizing. If there is good news for Canada in all this, it’s that commodity prices have remained elevated, which helps the country’s terms of trade.

For many economists, those conditions might warrant the central bank jettisoning its pretence that it will raise rates “over time,” and acknowledge a rate cut may equally be in the offing in the next year or so.

But Bank of Montreal economist Doug Porter said in a note Tuesday morning that Carney will want to await the results of the fiscal cliff talks in Washington, and is holding his fire — if he has any to shoot — until the announcement date on Jan. 23 when he knows better the situation.

Tuesday’s decision was the 18th consecutive time Carney has kept the policy rate at one per cent, comprising over two years, the longest stretch of stability since the 1950s.

Source: Julian Beltrame, The Canadian Press

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