Bank of Canada holds rates, raises growth view

The Bank of Canada held its key interest rate steady on Tuesday, as expected, and nudged growth forecasts for 2011 and 2012 higher to reflect the strength of the global economic recovery. The central bank held its overnight lending target at 1 percent for the third consecutive time after hiking rates three times between June and September 2010.
"Any further reduction in monetary policy stimulus would need to be carefully considered," it said in a statement that repeated the language used in its two previous rate decisions. It repeated that "considerable monetary stimulus" remained in place. The Canadian dollar softened to C$0.99 against the US dollar from C$0.9867 just before the announcement.
Markets mostly interpreted the statement as somewhat dovish, despite the slightly higher growth forecasts. "It's a little bit more optimistic in terms of the global economy. Nevertheless there are still sufficient headwinds that we don't think will push the bank to begin hiking until July of this year," said David Tulk, Senior Macro Strategist at TD Securities.
The central bank said the global economy was recovering somewhat faster than it had expected, and Canada's recovery was proceeding as anticipated. It expects the Canadian economy to grow by 2.4 percent in 2011 and by 2.8 percent in 2012. Last October it put likely 2011 growth at 2.3 percent and 2012 growth at 2.6 percent.
The bank still sees the economy returning to balance at the end of 2012, given more slack in the economy in the near term. The bank noted that Europe's sovereign debt problems remained a black cloud over the global recovery and Canada's high-flying currency was hurting exporters. Its description of the harmful effects of the strong Canadian dollar on the recovery was tougher than in previous statements.
"The cumulative effects of the persistent strength in the Canadian dollar and Canada's poor relative productivity performance are restraining this recovery in net exports and contributing to a widening of Canada's current account deficit to a 20-year high," it said. Forecasters in a Reuters poll last week unanimously predicted no change in rates on Tuesday, but a majority saw at least one rate hike by the end of May this year. Yields on overnight index swaps implied a quarter-point rate increase some time in the second quarter.