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Bank of Canada holds rate steady as Carney exits


Published May 29, 2013


The Bank of Canada held its benchmark interest rate steady at one per cent today, the last policy decision the bank will make before governor Mark Carney leaves to head the Bank of England.

The bank kept its target for the overnight rate steady at one per cent Wednesday. That's the same level it has been at for 22 consecutive policy meetings, dating back to September 2010.

The central bank's rate is the rate at which retail banks borrow money from each other for short-term loans. It's the basis for the saving and lending rates that they pass on to customers.

In a statement, the bank noted that the Canadian economy performed better than the bank expected in the first part of 2013. But it expects growth to moderate through the year, expanding by about 1.5 per cent as a whole.

That likely isn't enough to compel the bank to raise rates to slow things down and rein in inflation, nor is it sluggish enough to lower the benchmark rate to stimulate the economy further and spur borrowing.

No changes expected

"Consumer spending is expected to grow at a moderate pace, business investment to grow solidly, and residential investment to decline further from historically high levels," the bank said. "Growth in total household credit is slowing and the bank continues to expect that the household debt-to-income ratio will stabilize near current levels."

Next week, former Export Development Canada head Stephen Poloz will begin his tenure at the top of the bank. Most analysts don't expect any major deviations from policy when that happens.

"We do not expect a change in bias when incoming governor Stephen Poloz begins his tenure," TD Bank economist Francis Fong said in a note. "We expect a continuation of ... policy."

The central bank hinted that few changes are expected any time soon, saying in its statement that "with continued slack in the Canadian economy, the muted outlook for inflation, and the constructive evolution of imbalances in the household sector, the considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required."

That's the central bank's way of saying not to expect rates to move anywhere — up or down — any time soon, but it's leaning toward a slight rate hike at some point.

One possibly game-changer to that plan could be housing.

"I think housing is coming in softer than the Bank of Canada anticipated over the past year in light of, for example, the steep drop in Toronto’s new home sales that will result in much weaker housing starts going forward," Scotiabank economist Derek Holt said.

"What the [bank[ flags as “the constructive evolution of imbalances in the household sector” may well turn toward a somewhat harsher assessment of housing risks going forward."

The bank is slated to release its next policy decision in mid-July.


Source: CBC News

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