Bank of Canada Holds Interest Rate at 1 Per Cent: October Announcement

The BoC has not changed the overnight lending rateThe latest Bank of Canada rate announcement has been released, and while interest rates and stimulus measures remain consistent, future economic expectations are cautiously optimistic.

The overnight lending rate will stay put at one per cent – where it has remained as of September 2010 – with the Bank Rate at 1 ¼ per cent, and the deposit rate at ¾ per cent. Despite this, the BoC projects that the economy is on an uptick, with recovery gains anticipated in 2013.

It’s A Small World After All

Recovery may be projected, but the present still calls for caution.  While global conditions have seen subtle improvement as a result of swift policy implementation from central banks, European economic sentiment is morose, and emerging markets such as China continue to contract.

States the Bank of Canada in a release, “The economic expansion in the United States is progressing at a gradual pace. Europe is in recession and recent indicators point to a continued contraction. In China and other major emerging economies, growth has slowed somewhat more than expected, though there are signs of stabilization around current growth rates… Global financial conditions have improved, supported by aggressive policy actions of major central banks, but sentiment remains fragile.”

Growth On The Homefront

Despite rocky conditions internationally, Canada’s economy can expect steady growth, increasing by 2.2 per cent this year, 2.3 per cent in 2013, and 2.4 per cent in 2014. It’s also anticipated that full capacity will be reached in 2013, after lagging below average for several years. Business investment and consumption are considered the driving factors behind this growth, which point to stimulative domestic conditions.

Inflation is also expected to finally reach target growth in 2013, after floundering due to softer prices in goods and services. According to the Bank, “Core inflation is expected to increase gradually over coming quarters, reaching 2 per cent by the middle of 2013 as the economy gradually absorbs the current small degree of slack, the growth of labour compensation remains moderate and inflation expectations stay well-anchored. Total CPI inflation has fallen noticeably below the 2 per cent target, as expected, and is projected to return to target by the end of 2013, somewhat later than previously anticipated. “

High Household Debt Remains At Large

As the cost of borrowing remains historically low, record high household debt will continue to be a volatile domestic risk, and will rise further still before stabilizing next year – a warning for overextended borrowers who’ll be in for a shock when interest rates do rise.

The housing market will continue to decline, as it has since CMHC-implemented rules to limit borrowing power went into effect in June.

The Effects Of A Strong Dollar

As international economic conditions have been in turmoil, Canada has enjoyed “safe haven” status, as investors flock to Government bonds. While this is driving bond yields down, global uncertainty has also lead to a strong Canadian dollar – and exports continue to falter as a result.

According to the BoC’s statement: “Canadian exports are projected to pick up gradually but remain below their pre-recession peak until the first half of 2014, reflecting weak foreign demand and ongoing competitiveness challenges.  These challenges include the persistent strength of the Canadian dollar, which is being influenced by safe haven flows and spillovers from global monetary policy.”

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