Bank of Canada Holds Rates Steady

A domestic economy regaining ground alongside its U.S. counterpart wasn’t enough stimulus for the Bank of Canada to increase its key overnight rate Tuesday, with the growing threat of global oil prices and uncertainty in Europe encouraging it to maintain the status quo.

“Overall, economic momentum in Canada is slightly firmer than the Bank had expected in January,” reads its review statement. “In particular, the international price of oil has risen further and is now considerably higher than that received by Canadian producers. 

“If sustained, these oil price developments could dampen the improvement in economic momentum.”

In keeping its benchmark rate at 1 per cent, the bank is hoping any slowdown resulting from those higher gas prices and the steady withdrawal of provincial and federal stimulus spending will be offset by private sector investment. 

At the same time, it is conceding that the more problematic consumer spending will likely increase as a result of continuing low interest rates on borrowing. 

The Bank projects that private domestic demand will account for almost all of Canada’s economic growth over the projection horizon,” reads today`s statement. “Household spending is expected to remain high relative to GDP as households add to their debt burden, which remains the biggest domestic risk.” 

That statement, even despite warning that the Central Bank will move as soon as possible to raise its overnight rate, is likely to fuel calls for the federal government to tighten up mortgage rules in order to slow household debt. 

Still, there’s already some indication that consumers are acting more prudently, said Finance Minister Jim Flaherty last week. 

“I’m actually encouraged that the market itself is showing some correction,” he told reporters in Alberta. “We’re not seeing so much of that in Toronto, but in Vancouver, yes. And overall we’ve seen some moderations, some softening in the residential market and I think that is a good thing.”


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