Bank of Canada Holds Rates Again

In a much anticipated move, the Bank of Canada is holding on rates- again. Given the current economic climate globally, Mark Carney had little choice but to stay put.

The overnight rate will stay put at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

Although as recently as the last rate announcement in July a fall rate hike was almost a certainty, so much has happened in the last few weeks that a rate hike was yanked from the table. It was not just the fact that there was a series of events- it was the far-reaching impact of these events that gave policymakers and consumers reason to pause.

“The global economic outlook has deteriorated in recent weeks as several downside risks to the projection in the Bank’s July Monetary Policy Report (MPR) have been realized. The European sovereign debt crisis has intensified, a broad range of data has signalled slower global growth, and financial market volatility has increased sharply.”

“Recent benchmark revisions show that the U.S. recession was deeper and its recovery has been shallower than previously reported. In combination with recent economic data, this implies that U.S. growth will be weaker than previously anticipated. The Bank expects that American household spending will be even more subdued in the face of high personal debt burdens, large declines in wealth and tough labour market conditions. Fiscal stimulus in the United States will also soon turn into material fiscal drag. Acute fiscal and financial strains in Europe have triggered a generalized retrenchment from risk-taking and could prompt more severe dislocations in global financial markets.”

So then, what goes up does come down- hard.

The fact that the Canadian economy has lost some momentum has not gone unnoticed either- for the first time in several months.

“Largely due to temporary factors, Canadian economic growth stalled in the second quarter. The Bank continues to expect that growth will resume in the second half of this year, led by business investment and household expenditures, although lower wealth and incomes will likely moderate the pace of investment and consumption growth. The supply and price of credit to businesses and households remain very stimulative. However, financial conditions in Canada have tightened somewhat and could tighten further in the event that global financial conditions continue to deteriorate.”

Carney points out too, Canada’s heavy reliance on exports- and that that could be in jeopardy with the realization of the underlying fragility of the economies of several of our key trading partners.

Some are speculating that it may not be enough going forward to hold rates; Carney may be faced with the necessity of lowering rates again in the coming months, in order to preserve economic order at home.

Most economists believe that a rate hike is off the table now completely- now and in the near future, saying that that will not happen until Q2 2012 at the earliest.

Source: – September 7, 2011



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