Wednesday 4 June 2014

Bank of Canada Stephen Poloz holds interest rate at 1%

OTTAWA — The Bank of Canada kept its key interest rate on hold Wednesday, warning that the domestic economy is performing at a weaker-than expected pace and growth in the United States is also slower than hoped for.


But policymakers haven’t budged on their neutral stance of the direction of the next rate move, which is still likely to be at least a year off.  The central bank hasn’t touched that benchmark since September 2010 when it was locked in at 1%.

The Canadian dollar fell to a four-week low after today’s announcement.

Overall inflation recently strengthened to 2% — the midway point of the bank’s 1%-to-2% target zone. Policymakers, led by Governor Stephen Poloz, acknowledged the higher rate of annual price increases have come “sooner than anticipated,” but that is “largely due to the temporary effects of higher energy prices” and a stronger Canadian dollar.

“Global economic growth in the first quarter of 2014 was weaker than anticipated in the [bank’s quarterly outlook] and recent developments give slightly greater weight to downside risks,” the bank said.

“The U.S. economy is rebounding after a pause in the first quarter, but there could be slightly less underlying momentum than previously expected. Globally, long-term bond yields have continued their decline, reflecting in part growing market anticipation that interest rates will remain low over the long term. “

The bank’s rate decision came on the same day as reports showing Canada’s trade balance slipped back into a deficit in April and the United States shortfall widened by the largest amount in two years.

In Canada, in particular, the swing to a trade deficit came as a surprise to many analysts, who forecast a $2-million surplus for the month. Instead, Statistics Canada reported a deficit of $640-million.

“Both exports and imports contributed to the trade deficit in April,” said Derek Holt, at Scotiabank Economics.

“Energy was a major culprit behind thenegative export number as energy exports slid by a couple billion dollars. Note, however, that March energy exports were revised higher — not the first time in recent months — pointing to revision potential here.”

The U.S. trade deficit was larger than expected, coming in at US$47.2-billion in April. Economists had expected a deficit of a little more than US$40-billion after rising to US$44.2-billion a month earlier.

Still, while exports were mainly unchanged, imports to the U.S. rose 1.2% in April, “which tallies with stronger retail spending,” said Andrew Grantham, at CIBC World Markets.

“While the headline results may be disappointing, if the gain in imports is a reflection of strength in other areas — consumer spending  — it may not be all bad for expectations of Q2 growth.”

The loonie fell 0.3% to C$1.0940 per U.S. dollar at 10:01 a.m. in Toronto. One Canadian dollar buys 91.41 U.S. cents.

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