Bank of Canada holds the line on interest rates
The Bank of Canada left a key interest rate unchanged on Wednesday at three per cent, even though recent economic growth has been weaker than the bank had projected.
In leaving steady the overnight rate — what big banks charge each other for overnight loans — the central bank said the state of the U.S. economy and turbulence in global financial markets have evolved roughly as it forecast.
The bank said that global inflationary pressures remain elevated, with potential implications for import prices and inflation in Canada. Overall consumer price index inflation has moved above three per cent, and core inflation has stayed at 1.5 per cent, as expected, the bank said.
The bank's decision comes just days after Statistics Canada reported that economic growth in the second quarter of the year came in at a weak annualized growth rate of only 0.3 per cent.
The central bank forecast in July that the country's economy would grow at a 0.8 per cent annual pace in the second quarter, but prior to the release of the second quarter results, a deputy governor said the bank may have been too optimistic in its outlook.
On Wednesday, the Bank of Canada acknowledged that economic activity was "slightly lower than expected in July but still close to the economy's production capacity."
"In Canada, domestic demand has slowed modestly but remains strong. It continues to be supported by financial conditions that remain significantly better than those in most other major economies and by income gains stemming from past improvements in the terms of trade," the bank said.
Economists said they see the central bank remaining in neutral, barring a major change in economic data.
"Going forward, it is becoming clear the [Bank Canada] would have to see either significantly weaker than expected labour and/or housing markets or renewed stresses in Canadian financial markets conditions to consider easing further," said TD Bank economist Pascal Gauthier.
"Short of that, we look for the [bank] to stay on hold for the balance of the year," he said.
The Canadian dollar got a boost after the rate announcement. Down before the news, the loonie rose 0.67 of a cent to close at 94.25 cents US on currency markets.
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