Bank of Canada Keeps Interest Rates Unchanged March 1, 2011

With tighter Canadian mortgage standards introduction dates looming on March 18, 2011 and April 18, 2011, the Bank of Canada today announced that it would leave its benchmark overnight interest rate unchanged at 1.0%. This was the forth-consecutive decision to hold rates steady, following similar moves on January 18, 2011, December 7th, 2010 and October 19, 2010. Economists were not expecting the BOC to change interest rates today. A recent pole by Reuters last week found that “most analysts predicted the bank would resume rate hikes in the first half of the year, with May 31 being the most likely date for the next move.” Mark Carney raised concern over the strong Canadian dollar at the last BOC interest rate policy announcement date of January 18, 2011. The situation has not changed. Today the BOC said that while there is early evidence of a recovery in net Canadian exports supported by stronger U.S. activity and global demand for commodities, the sector continues to face considerable challenges from the cumulative effects of the persistent strength in the Canadian dollar. In it accompanying remarks, the Bank of Canada said that the “global economic recovery is proceeding broadly in line with the Bank’s projection” and that the “recovery in Canada is proceeding slightly faster than expected.” In its March 1, 2011 press release the Bank of Canada stated: OTTAWA – The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent. The global economic recovery is proceeding broadly in line with the Bank’s projection in its January Monetary Policy Report (MPR), although risks remain elevated. U.S. activity is solidifying and remains supported by stimulative fiscal and monetary policies. Ongoing challenges associated with sovereign and bank balance sheets will limit the pace of the European recovery and are a significant source of uncertainty to the global outlook. Robust demand from emerging-market economies is driving the underlying strength in commodity prices, which could be further reinforced temporarily by supply shocks arising from recent geopolitical events. The recovery in Canada is proceeding slightly faster than expected, and there is more evidence of the anticipated rebalancing of demand. While consumption growth remains strong, there are signs that household spending is moving more in line with the growth in household incomes. Business investment continues to expand rapidly as companies take advantage of simulative financial conditions and respond to competitive imperatives. There is early evidence of a recovery in net exports, supported by stronger U.S. activity and global demand for commodities. However, the export sector continues to face considerable challenges from the cumulative effects of the persistent strength in the Canadian dollar and Canada’s poor relative productivity performance. While global inflationary pressures are rising, inflation in Canada has been consistent with the Bank’s expectations. Underlying pressures affecting prices remain subdued, reflecting the considerable slack in the economy. Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. This leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in an environment of significant excess supply in Canada. Any further reduction in monetary policy stimulus would need to be carefully considered. Jim Flaherty, Canadian Minister of Finance announced new Canadian mortgage rules on January 17, 2011. The introduction of these new rules reduced the pressure on the Bank of Canada to increase rates on its January 18th announcement date and gave it some breathing room to push back anticipated interest rate increases further into 2011. Mark Carney tempered any views of a long-term “low interest rate” policy in Canada shortly after that. In an interview on CTV’s Question Period on Sunday January 23, 2011 (regarding Canadian household debt levels) Carney said, “Canadians could overextend themselves and they could get into a position where the debts that are sustainable at very low interest rates prove unsustainable when rates return to a more normal level.” “Don’t take the current situation and extrapolate it, extend it out to the future. At some point, interest rates are going to move higher, they’re going to go back to more normal levels,” added Carney. He then asked, “Can you service the debts you’re taking on today at that point?” In response to todays interest rate decision, Paul-André Pinsonnault, National Bank Financial said “There is a compelling case to be made for higher interest rates in Canada since excess supply is closing faster than previously anticipated by the Bank. We think that a April revised [monetary policy report] will set the table for the resumption of a normalization in monetary policy. We remain of the opinion that the next rate hike will occur at the May 31 interest-rate setting meeting.” Investors see a 92.20 percent probability rates will stay on hold April 12, up from 86.49 percent before the current statement, according to a Thomson Reuters calculation. The next Bank of Canada interest rate policy announcement date is Tuesday, April 12, 2011 followed by Tuesday, May 31, 2011, and Tuesday, July 19, 2011. References: 1. http://www.bankofcanada.ca/en/fixed-dates/2011/rate_010311.html 2. http://ca.reuters.com/article/domesticNews/idCA301BrandChannel=0 3. http://www.buyric.com/news/bank-of-canada-keeps-interest-rates-unchanged-jan-18-2011/ 4. http://www.buyric.com/news/mark-carney-warns-canadians-of-rising-interest-rates-in-2011/ 5. http://www.buyric.com/news/bank-of-canada-interest-rate-announcement-dates-for-2011/