Les Whittington Ottawa Bureau
May 31, 2011
OTTAWA-The world economic outlook is too precarious to risk pushing up Canadian interest rates, the Bank of Canada said today as it held its trend-setting overnight rate at 1 per cent.
Bank governor Mark Carney gave no indication when Canadian consumers and businesses can expect borrowing costs to rise, saying only that the central bank would move to push up interest rates "eventually."
With consumer prices rising, Carney might ordinarily be expected to start ratcheting up interest rates to slow business activity in hopes of heading off a burst of runaway inflation. But the bank maintained its aggressive, pro-growth stance on the grounds that the Canadian economy could still be dragged down by events abroad or the negative impact on Canada's exporters of the high-valued loonie.
"The U.S. economy continues to grow at a modest pace, limited by the consolidation of household balance sheets," Carney said in a statement.
"Growth in Europe is maintaining momentum, although the risks related to peripheral economies have increased," he commented in a reference to the severe debt problems faced by Greece and other nations.
Also, Carney said, "The disasters that struck Japan in March are severely affecting its economic activity and causing temporary supply chain disruptions in advanced economies.
"Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent," the statement said.
The bank said that, as the economic recovery in Canada gains momentum, it will move "eventually" to drive up borrowing costs to keep inflation under control. But the statement added: "Such reduction (in monetary stimulus) would need to be carefully considered."
Consumer price inflation, now at a 3.3 per cent, will remain in that range in the short term because of high energy prices and changes in indirect taxation by the provinces, Carney noted. But the bank believes this upward trend in prices will recede by the middle of next year.
However, there is the possibility of that greater momentum in household borrowing and spending in Canada will keep inflation higher than the bank expects.
On the other hand, the high value of the loonie on exchange markets could take some of the steam out of Canadian economic growth by undermining the competitiveness of Canada's exports, the bank said. This in turn would reduce upward price pressure.
"The persistent strength of the Canadian dollar could create even greater headwinds for the Canadian economy, putting additional downward pressure on inflation through weaker-than-expected net exports and larger declines in import prices," Carney said.
A few months ago, the bank had been expected to begin pushing up borrowing costs this spring or summer. But, with the U.S. economy struggling and problems in European deepening, most economists are currently expecting Carney to wait some months before raising the bank's trend-setting rate.
The next scheduled date for announcing the overnight rate is July 19.
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