Bank of Canada holds interest rate at 1 per centBank of Canada holds interest rate at 1 per cent

OTTAWA—Bank of Canada Governor Mark Carney kept the central bank’s influential interest rate at 1 per cent Wednesday and let Canadians know that borrowing costs are unlikely to go up any time soon.

Carney, who has kept interest rates at historically low levels for more than two years, will be long gone from Canada before the economy is growing fast enough to warrant an increase in borrowing charges, based on the bank’s latest statement.

He is leaving his Ottawa post this summer to take over the Bank of England, and economists say the Bank of Canada’s current stance means it will not be inclined to hit consumers and business borrowers with higher interest rates until next year at the earliest.

Carney, 47, will preside over two more interest-rate decisions in Ottawa before he heads for Britain in June. Having put the central bank governor’s job in the spotlight as never before, the high-flying former investment banker and Finance Canada official is going out with a bang. On Wednesday night, he was slated to join Foreign Affairs Minister John Baird as co-host of a glitzy gathering of politicians, authors and business people at the annual Politics and the Pen gala in Ottawa.

Given the continued slack in the Canadian economy and “the muted outlook for inflation,” the current level of the bank’s influential overnight rate “will likely remain appropriate for a period of time,” Carney said after holding the rate at 1 per cent Wednesday.

The bank’s current stance reflects the weak performance of the economy in the last months of 2012. Canada’s gross domestic product (GDP), which measures total output of goods and services, grew by a meagre 0.6 per cent on an annual basis in the final three months of last year. For 2012 as a whole, Canada’s economy recorded growth of 1.8 per cent, down from 2.6 per cent in 2011.

The central bank uses its key interest-rate setting to influence the level of borrowing costs at commercial banks. In doing so, the Bank of Canada tries to balance the need for low borrowing costs to stimulate the economy against the risk that too much activity by business and consumers will create unwanted inflationary pressure.

But, with the economy sputtering, economists say the bank is likely to stand pat until 2014.

“The Bank of Canada has just made it a bit more official that interest rates are almost certainly not going anywhere this year,” BMO Capital Markets economist Doug Porter commented.

“The domestic economy has been consistently disappointing in recent months,” Porter observed. “Growth has been a bit weaker than expected and inflation has been much lower than expected, and that’s really why the bank is now softening its language and suggesting there’s absolutely no urgency on raising rates.”

Still, Carney said “the bank expects growth in Canada to pick up through 2013, supported by modest growth in household spending combined with a recovery in exports and solid business investment.”

The bank predicted in January that the economy will expand by 2 per cent this year, but many economists have revised their predictions well below Carney’s forecast.

While borrowing costs are unlikely to rise soon, Carney and Finance Minister Jim Flaherty have been warning that consumers were taking on too much debt at a time of unusually low borrowing costs — a trend that could lead to widespread defaults if interest charges eventually rise in keeping with stronger economic growth.

Carney said Wednesday the warnings to consumers are having an effect and “residential investment is expected to decline further from historically high levels.”

The prospect of higher interest rates in Canada tends to bolster the value of the loonie on exchange markets, so the latest Bank of Canada announcement appears to have contributed to a sharp drop in the currency. The Canadian dollar closed Wednesday at 96.95 cents (U.S.), down 0.33 of a cent from Tuesday’s close.

The next scheduled date for announcing the central bank’s overnight rate target is April 17.

The Toronto Star

With files from Canadian Press

Bank of Canada holds interest rate at 1 per cent
March 06, 2013: 10:09 AM

Les Whittington / Ottawa Bureau reporter