Bank of Canada keeps interest rates unchanged

Les Whittington      
Ottawa Bureau     
 
OTTAWA—Warning that the recession in Europe will be worse than expected, the Bank of Canada held interest rates steady in its latest rate-setting.

Governor Mark Carney kept the central bank’s influential overnight rate at 1 per cent, as he has done for the past year while waiting for the world economy to open the way for more pronounced growth here.

“Uncertainty around the global economic outlook has increased in the weeks” since the bank released its quarterly forecast in October, Carney’s statement said on Tuesday morning.

“Conditions in global financial markets have deteriorated as the sovereign debt crisis in Europe has deepened. Additional measures will be required to contain the European crisis.

“The recession in Europe is now expected to be more pronounced than the Bank had anticipated,” Carney added, attributing this to tighter credit conditions, government belt-tightening measures and reduced business and consumer borrowing on the continent.

The latest rate-setting means Canadians need not worry about higher interest charges for some months and also raises questions about the possibility of a further rate cut by Ottawa’s central bank if world business conditions continue to disappoint.

BMO Capital Markets economist Doug Porter said some observers had expected Carney to hint at a possible lowering of the key overnight rate in future but the bank gave no indication of its next move.

“While there was no suspense on the rate decision (actually, none), most analysts were expecting a slightly more dovish tilt from the Bank, after it effectively closed the door on possible rate hikes at the previous meeting in October,” Porter said. He added that he expects Carney to stand pat with the current rate through 2012.

The bank said recent economic data in the United States shows that growth there “has been slightly more robust than anticipated, largely as a result of continued vigour in consumer spending and business investment.”

“Nonetheless, household deleveraging, fiscal consolidation and negative spillover effects from the European crisis are all expected to weigh on U.S. growth,” Carney said.

“Growth in China and other emerging-market economies continues to be strong, although there are signs that it is moderating to a more sustainable pace in response to weaker external demand and the lagged effects of past policy tightening.”

The bank said in Canada “growth in the second half of this year is slightly stronger than the Bank projected in October.”

“Household expenditures have more momentum than had been expected and business investment remains solid,” Carney said but added that the weak world economy will dampen growth prospects in this country in the months ahead.

The next scheduled date for announcing the overnight rate target is Jan. 17, 2012.