Bank of Canada keeps neutral view on 1% rate as growth quickens

Bank of Canada Governor Stephen Poloz kept his main interest rate unchanged and reiterated the next move depends on the progress of economic data after early signs of faster growth and inflation.

Policy makers kept the benchmark rate on overnight loans between commercial banks at 1%, where it’s been since September 2010, as expected by all 20 economists in a Bloomberg News survey.

“The fundamental drivers of growth and inflation in Canada continue to strengthen gradually,” policy makers led by Poloz, 58, said in a statement from Ottawa Wednesday. “The Bank judges that the balance of risks remains within the zone for which the current stance of monetary policy is appropriate.”

The decision follows three prior announcements where the bank suggested an easier path for monetary policy, which took the country’s dollar to four-year lows. The world’s 11th-largest economy still faces challenges from indebted consumers to weak exports and investment that will keep inflation “well below” the 2% target this year, the bank said.

Wednesday’s statement made no reference to the currency. It said that global financial markets have been more volatile, adding that “tensions in the Ukraine have added to geopolitical uncertainty.”

Concerns about slow inflation eased last month as Statistics Canada said the consumer price index accelerated more than forecast to 1.5% in January. The last report on economic growth, issued last week, showed expansion at a 2.9% annual pace at the end of last year, suggesting the economy has less spare capacity than the bank projected.

Canada’s economy will grow by about 2.5% this year, with growth likely below that pace in the first quarter, the central bank said Wednesday. The Bank of Canada’s one-page statement made six references to economic factors that are evolving about as policy makers forecast in January.

The Canadian dollar weakened as far as C$1.1224 per U.S. dollar in the days after the Jan. 22 monetary policy report, which said that the currency “remains strong and will continue to pose competitiveness challenges for Canada’s non-commodity exports.”

The weakness isn’t translating into large or rapid gains for manufacturing, according to Alain Bedard, Chief Executive Officer of Montreal-based trucker TransForce Inc. “The depreciation of the Canadian dollar could have some effect in the manufacturing sector of Canada,” he said on a Feb. 27 earnings call. “We are starting to see a little bit more activity in our truckload sector right now.”

The central bank in January said it will take about two years for inflation to return to policy makers’ 2% target because of slack in the economy and intense retail competition.

“The timing and direction of the next change to the policy rate will depend on how new information influences this balance of risks,” the central bank said today, echoing its January statement. “With inflation expected to be well below target for some time, the downside risks to inflation remain important.”

Bloomberg.com