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Bank of Canada leaves bank rate alone
Cites generally low inflation, slower growth for move
News Services
Published: Wednesday, January 17, 2007
OTTAWA -- The Bank of Canada announced yesterday that it's holding its
key interest rate steady at 4.25 per cent, saying inflation is largely in
line with its expectations.
The rate has been unchanged since May, when it was raised a quarter
point. The bank's decision yesterday was widely expected by economists
given recent modest inflation and mixed, but generally favourable,
readings on the economy. The 4.25-per-cent overnight rate is consistent
with achieving the inflation target of two per cent annually over the
medium term, the bank said.
The central bank said that at the end of 2006, the Canadian economy was
operating at, or just above, its production capacity. That helps take the
pressure off the bank to cut interest rates, which some speculate may
become necessary if the general slowing of the economy in the last
quarter of 2006 persists into this year. Policy makers "seem to think
that the worst is behind the Canadian economy," said Craig Wright, chief
economist at Royal Bank of Canada. "It may well suggest there is little
scope for any further reduction" in rates.
Several economists predict the bank will need to cut interest rates by
the third quarter of this year. Key to that prediction will be how
Canada's export sector, which has been struggling with the strong loonie,
will fare. The bank noted that slower U.S. economic growth in 2006
resulted in slower output growth in Canada, likely averaging about 1.6
per cent in the second half of last year.
"This was largely due to reduced U.S. demand for building materials and
motor vehicles, which has adversely affected Canada's exports, and to the
need for Canadian businesses to adjust inventories," the bank said.
Consumer inflation should average about one per cent in the first half of
2007, returning to two per cent in 2008, it said. |
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