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BoC Holds Rate Steady

6 September 2012

Happy second anniversary! It’s been two years since there’s been any increase to the overnight rate here in Canada and to celebrate, Bank of Canada governor Mark Carney has held the interest rate right where it is. For the time-being. While Mr. Carney certainly pointed (again) to the fact that interest rates won’t stay this low forever, he also pointed to the global economic indicators that are going to keep it right where it’s at for a little while yet.

According to the report released by the Bank of Canada, it’s a general slowing of the economy that’s caused the Bank to keep the rate at 1%.

“The economic expansion in the United States continues at a gradual pace,” the report read. “Europe is in recession and its crisis, while contained, remains acute. In China and other major emerging economies, growth is decelerating somewhat more quickly than expected from previously rapid rates.”

The Bank also nodded towards our positive GDP growth of 1.8 per cent in the second quarter, showing that while economic conditions around us may not be ideal, they’re currently not affecting us. And with the Bank’s projected GDP growth of 2.3% in 2013, it doesn’t look like those factors are going to be affecting us at all.

That, combined with the fact that the federal government has taken the pressure off the Bank to stem borrowing with all the recent and upcoming mortgage changes, also indicates that the overnight rate will remain lower for some time.

Douglas Porter, deputy chief economist at BMO Capital Markets, says that those predictions are a bit optimistic, and he puts GDP growth at around 2 per cent next year. He also says that while Canada may be protected from global headwinds now, if the economy continues to remain sluggish, we won’t have that umbrella forever.

This uncertainty, says Mr. Porter, is what’s going to keep the interest rate low until “deep in 2013.”

RBC agreed saying,

“Until there is clear evidence that policymakers outside of Canada have put in place programs that are sufficient to reverse these risks, Canadian interest rates will remain low to counter the negative fall-out on the domestic economy.”

These are just the kinds of predictions Mark Carney doesn’t want to hear. And, as with every interest rate announcement, the Bank once again reiterated their warnings that the low rates are not a permanent fixture.

The bank’s statement also said,

“To the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed, some modest withdrawal of the present and considerable monetary policy stimulus may become appropriate.”

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