Bank of Canada keeps overnight rate target at 3 per cent

OTTAWA – The Bank of Canada today announced that it is maintaining its target for the overnight rate at 3 per cent. The operating band for the overnight rate is unchanged, and the Bank Rate remains at 3 1/4 per cent.

Since the April Monetary Policy Report (MPR), economic developments have been broadly in line with expectations. However, the balance of risks to the Bank's April projection for inflation in Canada has shifted slightly to the upside. Although the composition of U.S. growth has not been favourable for demand for Canadian goods and services, overall, global growth has been stronger and commodity prices have been sharply higher than expected. At the same time, many of the downside risks to inflation identified in the April MPR have eased, while the evolution of credit conditions has been in line with expectations. The risk remains that potential growth will be weaker than assumed.

With the decline in first-quarter GDP, the Canadian economy is judged to have moved into excess supply, which is expected to increase this year. Consistent with the April MPR, the Bank continues to project that economic growth will pick up this year and accelerate in 2009, owing in part to a firming of U.S. demand and accommodative monetary policy in Canada.

If current levels of energy prices persist, total CPI inflation will rise above 3 per cent later this year. However, with the Canadian economy operating in excess supply, core inflation is expected to remain below 2 per cent through 2009. Both total and core inflation should converge on 2 per cent in 2010 as the economy returns to balance.

Against this backdrop, the Bank now judges that the current stance of monetary policy is appropriately accommodative to bring aggregate demand and supply into balance and to achieve the 2 per cent inflation target. There continue to be important downside and upside risks to inflation in Canada, which the Bank will monitor closely.

Information note:

The Bank of Canada's next scheduled date for announcing the overnight rate target is 15 July 2008. The Bank will publish an updated projection for the economy and inflation, and its assessment of the risks, in the Monetary Policy Report Update on 17 July 2008.

Bank of Canada to cut rates again

June 10, 2008 Julian Beltrame The Canadian Press

Bank of Canada governor Mark Carney had an easy decision to make yesterday. Facing a stumbling economy and possibly the world's most dormant inflation picture, the rookie central banker will trim interest rates 25 basis points and hope for the best.

It's a no brainer, say most economists, with 12 out of 12 agreeing in one survey.

The central bank's continued easing stance will take its key overnight rate to 2.75 per cent which, combined with the U.S. Federal Reserve's hint that it is through cutting its equivalent rate for now, has put downward pressure on the Canadian loonie.

The dollar slid below 98 cents US yesterday to close at 97.89 cents.

But while today's action appears a foregone conclusion, Carney's job is about to get significantly more complicated going forward, say economists, because no one knows to any degree of certainty what will happen next to the U.S. and Canadian economies.

"There's uncertainty with respect to the prospects of the U.S. economy.

"There is uncertainty about how credit markets will evolve, then you have oil,'' said TD Bank deputy chief economist Craig Alexander.

"The forecasts for oil range anywhere from $70 to $150 by the end of this year and from a point of view of the Canadian economy, boy does this have significant impact in terms of national income, inflation and relative economic performance.''

The TD Bank is one of the few forecasting institutions that believes Carney will go to the sidelines only briefly after Tuesday, then begin cutting again in the fall.

That's because, says Alexander, he believes the Canadian economy will continue to struggle for the remainder of the year, and that next year's recovery will be weaker than most assume.

The economy had a surprisingly weak first quarter, with a 0.3 per cent contraction that was well below the central bank's prediction of a one per cent advance. And with Canadian inflation still running below the central bank's target of two per cent, nothing is holding back Carney from his third rate cut since taking over in February.

Previously, he has twice cut rates by 50 basis points at a time -- deviating from the bank's usual changes in 25-point increments.

"We're in a bit of a special situation compared to a lot of other central banks,'' said Stephen Malyon, a currency strategist with Scotia Capital, of Canada's non-existent inflation. "That won't last forever.''

What could restrain the Bank of Canada in the future is the fear of inflation returning. With prices rising at close to four per cent in the U.S., Federal Reserve chair Ben Bernanke has signalled he is through cutting for now, despite last week's employment report that showed the country losing another 49,000 net jobs.