Bank of Canada holds key rate at 1%

The Bank of Canada held its target for the overnight rate at one per cent on October 19th, 2010 after having raised it by a quarter of a percentage point in June, July and September. Correspondingly, the Bank rate remained steady at 1.25 per cent and the deposit rate remains at 0.75 per cent.

The Bank advised it was cutting its outlook for economic growth and inflation due to government spending cuts and weakening consumer spending. Recognizing the housing market had cooled from its breakneck pace earlier this year, it said it expects households to focus more on paying down debt and to spend at “a pace closer to the rate of income growth over the projection horizon.”

The Bank also indicated “[its] inflation outlook has been revised down and both total CPI and core inflation are now expected to converge to 2 per cent by the end of 2012, as excess supply in the economy is gradually absorbed and inflation expectations remain well-anchored. The Bank had previously expected inflation to return to the midpoint per cent inflation target of two per cent at the beginning of 2012.

In a departure from previous statements providing guidance on when it might next raise interest rates, the Bank listed a number of factors likely to keep interest rates on hold for some time. “At this time of transition in the global recovery, with a weaker U.S. outlook, constraints beginning to moderate growth in emerging-market economies, and domestic considerations that are expected to slow consumption and housing activity in Canada, any further reduction in monetary policy stimulus would need to be carefully considered.”

Most financial market analysts expect the Bank to hold off on any further rate hikes until at least the first quarter of 2011 while it gauges the effects of previous interest rate hikes and a rising Canadian dollar on the domestic economy, and monitors how the very uncertain economic situation south of the border affects Canadian exporters.

Mortgage lenders recently cut five year closed mortgage interest rates. On October 19th, the advertised five year lending rate stood at 5.29 per cent. This is down from 5.39 per cent on September 8 when the Bank made its previous policy interest rate announcement, and among the lowest interest rates offered in 2010.

The Bank’s next Monetary Policy Report will be published on October 20th. The Bank will make its next scheduled rate announcement on December 7th.