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BoC to Leave Rates Low due to Slower Economy

24 January 2013

For the 19th decision date in a row (making that a total of 27 months,) Mark Carney and the Bank of Canada announced yesterday that they’d be leaving the Bank’s overnight lending rate at the historic low of 1 per cent. This, says Carney, is due to the fact that the economy has not performed as positively as was expected and so, low rates are needed to keep the economy chugging along. But while rates are expected to remain low until next year at least, Mr. Carney also says that rates aren’t going to stay low forever.

The weakening economy was given as one of the biggest reasons why rates will remain at the 1 per cent low, and that was indicated by a statement Prime Minister Stephen Harper.

“There has been a general slowing of the global economy over the past half-year so it is obviously a concern to us,” said the Prime Minister. “And, it’s going obviously to have some fiscal impact on us, will have some impact on the pace of job creation.”

A concern, indeed. While the economy was expected to pick up by about 2.5 per cent in the first quarter of the year, it crept along at only 1 per cent. And the Bank has also downgraded those expectations to three-tenths, setting it around 1.9 or 2.0 per cent, Thus the reason for keeping interest rates low. But there’s another reason, too. And this one brings a bit of good news.

We’re starting to pay attention to the weakening housing market, and we’re starting to cut back on our own household debt! Mr. Carney spoke about the balance returning to the housing market when giving his rate decision statement.

“While some modest withdrawal of monetary policy stimulus will likely be required over time, consistent with achieving the two per cent inflation target, the more muted inflation outlook and the beginnings of a more constructive evolution of imbalances in the household sector suggests that the timing any such withdrawal is less imminent than previously anticipated,” said Mr. Carney.

Doug Porter, an economist at Bank of Montreal that often speaks out about the economy, also touched on the household debt issue after the rate decision was announced.

“The prior reason for the seeming disconnect between the tough talk and a squishy soft economy was the bank’s laser-like focus on the build-up in household debt,” said Mr. Porter. “With the bank now sending some fairly strong signals that it thinks the path for household debt is moderating meaningfully, the case for rate hikes has receded accordingly.”

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