Bloomberg News

Bank of Canada Keeps Key Rate at 1% as Europe Crisis Deepens

December 07, 2011

(Updates with bond yields in sixth paragraph, economist comment in last paragraph.)

Dec. 6 (Bloomberg) -- The Bank of Canada kept its key policy interest rate unchanged today and cited Europe’s deepening debt crisis as raising risks to global economic growth.

The Ottawa-based central bank left its target for overnight loans between commercial banks at 1 percent, where it has been since September 2010, as forecast by all 26 economists surveyed by Bloomberg News.

“The recession in Europe is now expected to be more pronounced than the Bank had anticipated in October,” policy makers led by Governor Mark Carney, 46, said in a statement from Ottawa today. “There is considerable monetary policy stimulus in Canada,” the bank said, echoing its Oct. 25 decision when policy makers removed a reference to the need for paring monetary stimulus.

Growth in the world’s 10th-largest economy will slow next year, due to weaker global demand and the “challenge” of persistent currency strength, after expanding in the second half of this year at a faster pace than forecast, the bank said. Carney, who was named chairman of the Financial Stability Board last month, said Nov. 23 he has “flexibility” in keeping interest rates low while meeting his inflation target.

‘Quite Comfortable’

The bank is “quite comfortable being at 1 percent,” said Mazen Issa, Canada macro strategist for TD Securities Inc. in Toronto. “The need for an outright additional rate cut in Canada isn’t there,” and policy makers are “looking through” the recent rebound in Canadian growth, he said, predicting no move until March 2013.

Canada’s currency rose after the decision, trading 0.3 percent stronger at C$1.0133 per U.S. dollar at 11:01 a.m. in Toronto. One Canadian dollar buys 98.69 U.S. cents. Bonds fell, with the two-year government yield rising 4 basis points to 0.91 percent.

“The weaker external outlook is expected to dampen GDP growth in Canada through financial, confidence and trade channels,” the bank said today. The statement also reiterated Carney’s comment last month that the economy would return to full capacity “well into 2013,” a slight change from the October prediction that full output would resume by the end of that year.

European leaders have spent two years struggling to prevent the region’s sovereign debt crisis from affecting the region’s largest economies. Germany and France risk losing their AAA credit ratings in a review of 15 euro nations for possible downgrades, Standard & Poor’s said yesterday.

Growth to Slow

Canada’s gross domestic product growth will slow to 1.9 percent in 2012 from 2.1 percent this year, the central bank said in its October forecast.

Market-determined interest rates have been falling without the central bank reducing its benchmark rate. Canada’s five-year bond yield had fallen 27 basis points to 1.37 percent since the October central-bank decision. Finance Minister Jim Flaherty said yesterday he may offer new stimulus if domestic growth sags.

Growth rebounded in the third quarter to a 3.5 percent annualized pace following natural disasters that slowed exports and output in the prior three months, Statistics Canada said Nov. 30. Companies such as Montreal-based jet maker Bombardier Inc. say they haven’t seen a sharp decline in demand for their products.

“Yes, there is caution, as a result of the economy, in the market, but orders are still being placed for business jets,” Barry MacKinnon, director of market development at Bombardier, said at a Nov. 15 industry conference.

Inflation Outlook

Consumer prices advanced 2.9 percent in October from a year earlier, Statistics Canada said Nov. 18, and the central bank predicts inflation will slow to 1 percent by the middle of next year. The central bank sets rates to keep prices advancing in the middle of a 1 percent to 3 percent range.

The bank today said it would “continue to monitor carefully economic and financial developments,” and “set monetary policy consistent with achieving the 2 percent inflation target over the medium term,” repeating language it used in October.

“They are presenting a very balanced view” of growth in North America and risks in Europe, said Dawn Desjardins, assistant chief economist at Royal Bank of Canada in Toronto. “It’s not just doom and gloom from the Bank of Canada’s perspective.”

--With assistance from Ilan Kolet in Ottawa. Editors: Paul Badertscher, Vince Golle

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net

To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net; David Scanlan at dscanlan@bloomberg.net


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