Bank of Canada stands pat on interest rates (Bank of Canada leaves interest rates alone)

Hi all,

Looks like rates are going to stay where they are for the time being and could very well drop.

TAVIA GRANT

Globe and Mail Update

The Bank of Canada left its key interest rate unchanged at 4.25 per cent, as expected, and said rates are at the right level to achieve the bank's inflation targets over the “medium term.”

The central bank's overnight lending rate has been steady since May, though many economists are expecting a rate cut next year. In Tuesday's statement, the bank gave little indication that it plans to lower interest rates in the coming months.

It still sees core inflation and overall inflation in Canada converging at 2 per cent in the second half of next year.

“In line with the bank's outlook, the current level of the target for the overnight rate is judged at this time to be consistent with achieving the inflation target over the medium term,” the central bank said.
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Bank of Canada Gov. David Dodge speaks to members of The Sydney Institute and the Canadian Australian Chamber of Commerce in Sydney on Monday.

Bank of Canada Gov. David Dodge speaks to members of The Sydney Institute and the Canadian Australian Chamber of Commerce in Sydney on Monday. (Rick Rycroft/AP)

The most important change to the central bank's statement was removing a reference to the economy as operating above capacity, noted National Bank Financial. The bank dropped the reference amid expectations of weak economic growth in the second half of this year.

“This is an important development as it is the first step for opening the door to fine-tuning of monetary policy in 2007 (read rate cuts),” said economists Stéfane Marion and Paul-André Pinsonnault in a note.

“Should job creation take a downturn, we would anticipate the Bank of Canada to alter its risk assessments of the economy and its inflation outlook as soon as...January,” they said, adding that they expect a rate cut in March.

The central bank said its outlook for Canadian economic growth and inflation through to 2008 is “essentially unchanged” from its views in October.

However, “some recent indicators suggest that output growth in Canada and the United States in the fourth quarter of 2006 may be a little weaker than previously expected,” the bank said.

The bank again noted that a risk remains that the U.S. economy could slow more sharply than expected, leading to lower Canadian exports.

“The bank judges that, overall, risks around the inflation projection are roughly balanced,” it said.

The Bank of Canada makes its next interest-rate decision on Jan. 16, followed by its monetary policy report update two days later.