Bank of Canada Interest rate changes

by Tim Broadway

Summary: At its September announcement, the Bank of Canada kept its target for the Overnight Lending Rate at one per cent, while noting that the need to withdraw financial stimulus has diminished. The Bank pointed out that several of the downside risks related to growth noted in earlier reports – the European debt crisis, slower global economic growth including in the United States, a troublesome fiscal situation in the US and financial market volatility – have been realized in the past several months.

Analysis: The Bank of Canada’s latest release focused on some of the negative economic developments that have taken place recently, and represented an about-face for the interest rate outlook in Canada for the next two years. While economic growth is currently expected to resume in the last half of the year, after stalling in the second quarter, it is expected to be more muted than originally expected due to slower exports to the United States and other countries and a more general trickle-down of global economic conditions. For this reason, inflationary pressures are expected to recede, rendering rate hikes unnecessary in the near term. The consensus view is that the Bank will be on the sidelines at least until midway through 2012, if not into 2013.