The Bank of Canada kept its target for the overnight rate at one per cent for the second consecutive meeting on December 7th, 2010. Correspondingly, the Bank rate remained at 1.25 per cent and the deposit rate remains at 0.75 per cent.

The Bank noted that, while the global economic recovery is proceeding largely as expected, the risks surrounding the outlook have increased. Specifically, sovereign debt concerns in several countries risk triggering “renewed strain in global financial markets.”

Globally, the Bank noted that private domestic demand in the U.S. was slowly picking up, and that recent data from Europe were indicative of a modest recovery. And while economic growth remains robust in emerging-market economies, it has begun to ease to more sustainable levels.

In Canada, the Bank said the recovery was proceeding at a moderate pace, with slightly weaker than expected growth in the second half of 2010 masking robust business investment and stronger than expected household spending.

The Bank made clear that weaker than anticipated net exports were responsible for dragging down growth, saying, “This underlines a previously-identified risk that a combination of disappointing productivity performance and persistent strength in the Canadian dollar could dampen the expected recovery of net exports.”

The Bank indicated that inflation in Canada had been in line with expectations, and that “the underlying pressures affecting prices remain largely unchanged.” In its October Monetary Policy Report (MPR), the Bank reported that inflation was forecast to return to its 2 per cent target by the end of 2012.

Most financial markets expect the Bank to start raising rates again in March, although economic analysts predict that it will stand pat until next July. While the overnight rate remains very accommodative, the Bank nevertheless reiterated its statement that “any further reduction in monetary policy stimulus would need to be carefully considered.” With the U.S. Fed still in quantitative easing mode, further hikes by the Bank of Canada risk an even stronger Canadian dollar, and that would put even more pressure on the already struggling export sector.

Mortgage lenders recently lowered their five-year mortgage interest rates. As of December 7th, the advertised five year lending rate stood at 5.19 per cent. This is down from 5.29 per cent on October 19th when the Bank made its previous policy interest rate announcement, and the lowest rate thus far in 2010.

The Bank’s next Monetary Policy Report will be published on January 19th, 2011. The Bank will make its next scheduled rate announcement on January 18th, 2011.

(CREA 7/12/2010)

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