Bank of Canada Keeps 1.0% Target Interest Rate and Releases Dovish Statement

October 19, 2010

Canadian monetary policy tightening was paused as expected after three consecutive 25-basis point increases of the overnight target rate implemented June 1, July 20 and September 8.

Projected growth in real GDP was revised down to 3.0% for 2010 from forecasts of 3.5% made in July and 3.7% made six months ago.  The growth projection for 2011 was cut to 2.3% from 2.9% assumed last July and 3.1 foreseen last April and 3.5% projected at the start of this year.

As a result of those revisions, full capacity is not seen getting reached until the end of 2012, a whole year later than assumed three months ago and eighteen months after the target date envisaged in the April Monetary Policy Report.  Officials do not see inflation climbing back to 2% for another two years.  These changes justify leaving considerable monetary stimulus in place much longer than previously implied.  A new statement from the Bank of Canada released today spells out the nature of “unusual uncertainty surrounding the outlook,” which was mentioned in the September 8th statement as reason for carefully considering any further reduction in monetary stimulus beyond the three moves taken up to the point.  Today’s statement speaks of a “transition in the global recovery, with a weaker U.S. outlook, constraints beginning to moderate growth in emerging-market economies, and domestic conditions that are expected to slow consumption and housing activity in Canada.”

A new Monetary Policy Report will be published this Thursday, and the next and final scheduled policy rate announcement of 2010 is on December 7.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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