Bank of Canada Leaves Rate at 3%


The Bank of Canada left its key interest rate unchanged, saying economic risks are ``balanced'' between inflation that may double policy makers' target and the slowest growth since the country's last recession.

Governor Mark Carney and his five deputies left the rate on overnight loans between commercial banks at 3 percent, the lowest since December 2005. All 28 economists in a Bloomberg survey predicted the decision, the second straight time policy makers have held borrowing costs steady after four reductions between December and April.

Carney may be able to stay on hold even as high oil and gas costs spark inflation, because slowing factory sales to the U.S. may lead to the weakest economic growth since 1992. Policy makers pared their 2008 growth forecast to 1 percent today from 1.4 percent in April, while forecasting inflation to return to their 2 percent target in the second half of 2009 after rising past 4 percent.

Inflation hasn't reached 4 percent since March 2003. Carney last month said higher energy costs would push consumer prices above 3 percent this year. The Bank of Canada sets rates to keep inflation at 2 percent as often as possible and always between 1 percent and 3 percent.

Policy makers also said today that inflation will exceed 4 percent just ``temporarily,'' and that the economy will build up more ``excess supply'' over the rest of this year because of weak U.S. demand and volatile global financial markets.

The Federal Reserve and the Bank of England kept borrowing rates unchanged at their last decisions even as they highlighted inflation risks, taking pressure off of Carney to tighten before he's sure such a move would benefit the economy.

Canada's inflation record this year is better than other Group of Seven industrialized nations: consumer prices advanced 2.2 percent in May from a year earlier, compared with 4.2 percent in the U.S. and 3.3 percent in the U.K.

Still, on a monthly basis, Canada's inflation quickened at the fastest pace since 1991 in May as gasoline prices surged.

Canada's last rate increase was July 2007 and the bank may not tighten again until the first quarter of next year, according to economists surveyed by Bloomberg.

Plunging automobile exports caused the economy to shrink for the first time in almost five years in the first quarter. Most cars and trucks made or assembled in Canada are shipped to the U.S., where consumers' ability to buy expensive items has been sapped by a housing-market recession and job losses.

Canada's high dollar has also made exports less competitive. The currency hit a record 90.58 Canadian cents per U.S. dollar on Nov. 7 and has traded near parity all year, bolstered by demand for commodities. Canada is home to the second-biggest crude oil reserves behind Saudi Arabia, and is the No. 2 wheat exporter.

Last week, reports showed Canadian employers trimmed payrolls in June for the first time this year, while the country's trade surplus with the U.S. and home prices stalled the month before, according to Statistics Canada.


TradingEconomics.com, Bloomberg
7/15/2008 6:48:26 AM