The Bank of Canada announced this morning that it is keeping the main interest rate, its target for the overnight rate at 0.25%. It also maintained its commitment to keep mortgage rates at their current levels until the end of Q2 2010, but again stated that the Bank retains considerable flexibility to change if inflation (or the housing market) gets out of hand.
In the announcement they said that the global economic recovery has started, mainly due to improving financial conditions and stronger demand domestic demand growth in many emerging-market economies. While the outlook for global growth through 2010 and 2011 is somewhat stronger than the Bank had projected in its October Monetary Policy Report, the recovery continues to depend on exceptional monetary and fiscal stimulus, as well as extraordinary measures taken to support financial systems.
Canada’s economy grew in Q3 2009 and is believed to have grown even more in Q4 2009, while total CPI inflation was positive in the last quarter, the core rate of inflation has been slightly higher than expected recently. Nonetheless, the Bank believes the economy was operating 3.25% below capacity in Q4 2009.
Canada’s economy is expected to return to full capacity, with 2% inflation, in Q3 2011, while the economy will grow:
- -2.5% 2009 (results)
- 2.9% in 2010
- 3.5% in 2011
Factors driving the recovery:
- Policy support
- Increased confidence
- Improving financial conditions
- Global growth
- Higher terms of trade
Factors creating a drag on economic activity:
- Strength of the Canadian dollar
- Low absolute level of U.S. demand
These factors have shifted the balance to domestic demand growth and away from net exports.
No mention was made of the potential housing bubble that everyone is talking about after CREA’s latest report citing December 2009 as the highest month of housing sales on record.