The Bank of Canada is maintaining its target for the overnight rate at 1%. The Bank Rate is correspondingly 1.25% and the deposit rate is 0.75%.
The global economy has unfolded broadly as the Bank projected in its July Monetary Policy Report.
The economic expansion in the U.S. is progressing at a gradual pace, while Europe is in recession and recent indicators point to a continued contraction.
In China and other major emerging economies, growth has slowed somewhat more than expected, though there are signs of stabilization around current growth rates. Notwithstanding the slowdown in global economic activity, prices for oil and other commodities produced in Canada have, on average, increased in recent months.
Global financial conditions have improved, though, and are supported by aggressive policy actions of major central banks. Investor sentiment remains fragile.
In Canada, domestic factors are supporting a moderate expansion; following the recent period of below-potential growth, the economy is expected to pick up and return to full capacity by the end of 2013.
The Bank continues to predict the expansion will be driven mainly by growth in consumption and business investment, reflecting very stimulative domestic financial conditions.
Housing activity is expected to decline from historically high levels, while the household debt burden is expected to rise further before stabilizing by the end of the projection horizon.
Canadian exports are projected to pick up gradually but remain below their pre-recession peak until the first half of 2014, reflecting weak foreign demand and ongoing competitiveness challenges.
These include the persistent strength of the Canadian dollar, which is being influenced by safe haven flows and spillovers from global monetary policy.
After taking into account revisions to the National Accounts, the Bank projects that the economy will grow by 2.2% in 2012, 2.3% in 2013 and 2.4% in 2014.
Core inflation has been lower than expected in recent months, reflecting somewhat softer prices across a wide range of goods and services. It’s expected to increase gradually over coming quarters, reaching 2% by the middle of 2013 as the economy absorbs the current small degree of slack.
Growth of labour compensation remains moderate, and inflation expectations stay well anchored. Total CPI inflation has fallen noticeably below the 2% target and is projected to return to target by the end of 2013.
Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1%. Over time, some modest withdrawal of monetary policy stimulus will likely be required, consistent with achieving the 2% inflation target.
The timing and degree of any such withdrawal will be weighed carefully against global and domestic developments, including the evolution of imbalances in the household sector.