Bank of Canada maintains interest rate at 1%, says economy improving

Mike Eppel, 680News staff and The Canadian Press Mar 08, 2012 12:54:30 PM
The Bank of Canada is maintaining the overnight lending rate at one per cent, where it has sat since September of 2010.

However, the central bank says it believes conditions have improved both at home and abroad since its last policy-setting date in January, as the European debt crisis is showing signs of stabilizing and the U.S. recovery is proceeding forward if at a modest rate.

The improvements have had spillover effects on Canada, pumping up commodity prices, exports and private demand within the country.

The central bank now expects the economy to post a marginally better first three months to the start of this year than the 1.8 per cent advance it had forecast in January.

The bank cautions, however, that some of these improved conditions may be temporary, because of other factors.

"The Bank of Canada I think is very worried about the level of the Canadian dollar, and doing anything - like hiking interest rates - that would attract greater foreign flows into the domestic currency in order to light it up even further," Derek Holt, Scotiabank's senior VP of economics told 680News.

"Secondly, they're worried about the impact of high oil prices on the global economy but also what impact it would have upon the Canadian dollar," he added.

In addition, the central bank says a big risk to the economy remains debt loads for consumers.

Underlying economic momentum remains around trend, which suggests the bank continues to believe Canadian growth will average around two per cent in 2012.

The bank adds that inflation appears to be somewhat firmer than forecast, and there is no indication interest rates will go up anytime soon. Banks are still retaining record low mortgage rates.

Economists had expected the bank to maintain its low interest rate policy through to next year, but Thursday's decision may be aimed at reshaping those expectations.