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Archive for May, 2011

Bank of Canada Leaves Interest Rates Unchanged

Mark Carney and the Board of Governors announced today that they are leaving  Canada’s key monetary policy rate unchanged at 1.0%. Correspondingly there will be no change to Canadian Prime rates at the current time.

Background:

The Band of Canada indicated that both the Canadian and global economic recoveries have proceeded largely as expected, however there are still risks: The Canadian recovery faces risks if the Canadian dollar continues its high flying ways (a strong currency makes it difficult for our exporters to do business).

The U.S. recovery faces challenges due to tapped-out  consumers in that country.  High debt levels are constraining spending.The global expansion faces risks from so- called “peripheral” economies – those seeking continued support via various bailout programs.

Carney noted that, although commodity prices have come off their highs recently, the Bank expects them to remain at elevated levels for the foreseeable future.

One new factor is the effect of  the March disasters in Japan, which have caused temporary supply chain disruptions throughout developed economies.

Canadian growth is expected to soften slightly in the 2nd quarter of 2011, with a rebound in the second half of the year.Total CPI inflation is running at a hefty 3%+, but is expected to moderate due to currency effects.

Carney gave no real clues as to when to expect rates to begin increasing, but they are coming – the Bank indicated that some of the considerable monetary stimulus currently in place will be eventually withdrawn.

It now looks like the expected July rate hike is off the table and and any interest rate increase will be pushed out further into the fall.  Mr. Carney will probably want to get at least a preliminary look at how 3rd quarter GDP unfolds before making any decision to hike rates.

Implications

With no change to prime rates today, or in the foreseeable future, Canadians should be tempted to resume spending, which could translate into continued use of credit by consumers. With mortgage rates continuing at historic lows, some bump to the housing sector is expected.  This could lead to increased mortgage (and house-buying) activity.The beat goes on……

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