Bank of Canada keeps key rate unchanged at 1 per cent despite improving economy

The Bank of Canada is keeping its key interest rate on hold at one per cent and giving no hint as to when it will start raising rates again.

The decision announced Tuesday came despite a mostly upbeat assessment of the Canadian economy from the central bank that predicts faster growth and a quicker return to full capacity.

Bank governor Mark Carney has resisted pressure to start lifting the benchmark policy rate above one per cent for months and was unlikely to change course when any move would likely become a talking point in the federal election campaign.

The bank has not hiked interest rates since last September.

In remarkably neutral language, the bank did indicate it is taking a more positive view of the economic recovery, while continuing to flag trouble spots.

``Although recent economic activity in Canada has been stronger than the bank had anticipated, the profile is largely consistent with the underlying dynamics outlined in January,'' it wrote in a statement accompanying the rate announcement.

``Aggregate demand is rebalancing toward business investment and net exports and away from government and household expenditures.''

``As in January, the bank expects business investment to continue to rise rapidly and the growth of consumer spending to evolve broadly in line with that of personal disposable income, although higher terms of trade and wealth are likely to support a slightly stronger profile for household expenditures than previously projected.''

The bank said it believes the Canadian economy will now grow by 2.9 per cent this year _ half-a-point higher than its last prediction in January _ before slowing to 2.6 per cent in 2012 and 2.1 in 2013.

Still, the head start means the economy will return to full capacity by mid-2012, about six months earlier than it thought.

The bank's latest growth profile puts it more in line with private sector economists and what is already known to have occurred, including a much stronger-than-expected fourth quarter of 2010 and first quarter of 2011.

The economy is known to have grown by 3.3 per cent in the fourth quarter, a full point more than the bank's previous estimate, and will likely expand by about four per cent in the just completed first quarter, again more than a point greater than the bank's prediction.

While it believes the global and Canadian recoveries are becoming more entrenched, the bank also makes clear that there are plenty traps out there that could upset the apple cart. The steady rise of oil prices is contributing to the emergence of global inflationary pressures, it said, and a dollar trading well above parity with its U.S. counterpart is undermining one of the strengths in the Canadian economy _ exports.

``The persistent strength of the Canadian dollar could create even greater headwinds for the Canadian economy, putting additional downward pressure on inflation through weaker-than-expected net exports and larger declines in import prices,'' it said.

It also cited the shock to Japan's economy following the earthquake and tsunami, sovereign debt in Europe and both government and household debt in the U.S. as speed limits to growth.

But it added: ``Despite the significant challenges that weigh on the global outlook, global financial conditions remain stimulative and investors have become noticeable less risk averse.''

In Canada, overall inflation is a little hotter and core inflation a little cooler than expected, but the bank attributed that to temporary factors and said it expects both to converge at the desired two per cent target by the middle of 2012.


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