Bank of Canada Interest Rate to stay at $.25
June 4 (Bloomberg) — The Bank of Canada kept its key lending rate at a record low as expected, cautioning that the strengthening currency could “fully offset” recent improvements in financial markets and consumer confidence, and prolong the recession.
The target rate for overnight loans between commercial banks remains at 0.25 percent, a decision forecast by all 22 economists surveyed by Bloomberg News. Policy makers also reiterated they have no plan to change the rate over the next year, and that they still have “flexibility” to use other measures should more stimulus be needed.
The world’s eighth-largest economy shrank at a 5.4 percent annual pace in the first quarter, less than the 7.3 percent central bankers had predicted, a sign the recession is easing. The strengthening Canadian dollar, which posted its biggest monthly gain in more than 50 years in May, is hobbling a return to growth by reducing demand for the country’s already frail exports of goods such as cars and lumber to the U.S.
“If the unprecedentedly rapid rise in the Canadian dollar, which reflects a combination of higher commodity prices and generalized weakness in the U.S. currency, proves persistent, it could fully offset these positive factors,” the Bank of Canada said in a statement today from Ottawa.
Confidence Improved
The bank said consumer and business confidence, prices for exported commodities and financial conditions have all improved in the past few weeks. Still, the recovery of the global and Canadian economies will be “more muted than usual,” the statement said.
The Canadian currency strengthened 1.3 percent to C$1.0964 per U.S. dollar at 11:25 a.m. in Toronto, from C$1.1104 yesterday. Canada’s dollar touched C$1.0785 on June 1, the highest level in eight months, and Scotia Capital said today it will reach parity by the end of 2010.
“It’s a concern for the Bank of Canada, but not so large it demands a policy response,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. The central bank may react later if the currency keeps rising while commodity prices fall, he said.
Policy makers didn’t provide specific updated projections today for economic growth or inflation.
Rate to Stay Unchanged
The central bank’s mandate is setting interest rates to keep inflation at 2 percent. It said in April that the consumer price index will fall by 0.8 percent in the third quarter of this year, and not return to target before the second half of 2011.
“Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target,” the central bank said today.
“The bank retains considerable flexibility in the conduct of monetary policy at low interest rates,” the statement said.
The Bank of Canada said April 23 it’s ready to purchase debt if the outlook for the economy deteriorates further, a development it doesn’t expect.
The central bank’s past rate cuts are working, said Patrick Daniel, chief executive officer of Enbridge Inc., the biggest transporter of oil to the U.S. from Canada’s oil sands. He also said Canadian energy companies are benefiting from a rise in the price of crude oil, which has gained 52 percent this year.
‘Still a Lot of Pain’
“The spreads are still quite wide on bonds, corporate bonds, but they are narrowing in and getting better every day,” he said in an interview. “There is still a lot of pain and agony as a result of the recession, and the GDP growth rate is almost non-existent, so we still have a long way to go.”
Exports fell an annualized 30 percent in the first quarter, led by the automotive industry, Statistics Canada said June 1. Canada is among the most export-dependent countries in the Group of Seven, generating 30 percent of its output from shipments of goods and services abroad.
Canada and Ontario are investing $9.5 billion in General Motors Corp. to keep production of the bankrupt company in Canada. Those governments have also pledged $2.42 billion for Chrysler LLC’s local operations, joining with the U.S. to try to rescue the auto firms.
The economy will shrink by 3 percent this year, the central bank predicts. That would be the biggest drop since 1933, according to Statistics Canada.
“Traffic is down significantly, we are just hanging on,” said Ron Lennox, vice president of the Canadian Trucking Alliance in Ottawa, which represents 4,500 companies. “Keep interest rates low to help us in this economy, don’t pull them up too fast.”
