Bank of Canada holds rate steady, for now

By Staff, with files from The Canadian Press | March 4, 2015 | Last updated on March 4, 2015
2 min read

The Bank of Canada is holding its key interest rate at 0.75%–for at least another month.

In its latest rate announcement, the central bank said Wednesday it stuck with the rate because the evolution of oil prices as well as the global and Canadian economies had largely unfolded in line with its projections.

Read: Economy slows to 2.4% amid oil plunge

The bank underlined several areas where it said economic conditions had hit close to its assumptions: the stronger performance in non-energy exports and investment, the economic growth reading for the final three months of 2014 and core inflation near its 2% target.

“In light of these developments, the risks around the inflation profile are now more balanced and financial stability risks are evolving as expected,” the bank said in a statement.

It was the bank’s first policy announcement since January when governor Stephen Poloz caught markets by surprise by lowering the rate a quarter of a percentage point from 1%.

In explaining January’s rate reduction, the governor said it was necessary as insurance because the drop in oil prices would be “unambiguously negative” for the economy.

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Most experts had anticipated the bank’s decision to hold the line on the rate Wednesday, but only a couple of weeks ago, many of them had predicted a second cut. Those expectations changed over the past week after fresh data releases and remarks by Poloz led them to believe the bank would stand pat.

Last week, Poloz said January’s rate drop bought the bank extra time to assess the impact of oil’s decline.

Some economists expect the bank to introduce a cut at its next scheduled rate announcement on April 15, when it will also release its spring monetary policy report. But CIBC World Markets economist Nick Exharos says the bank isn’t dropping any hints in its latest statement about raising rates.

“What is surprising is that the statement doesn’t appear to open the door to further easing ahead, by describing the ‘degree of monetary stimulus’ as ‘still appropriate,’ ” Exharos writes in a note to analysts.

“The fact that the BoC hasn’t given us clues on further easing should be negative for fixed income, and positive for the Canadian dollar,” he adds. “However, if the loonie strengthens too much, it would reverse some of the easing in financial conditions that Poloz had achieved from the first rate cut, and are cited as positive in the rate announcement explicitly.”

On Wednesday, the bank said financial conditions in Canada had “eased materially” since January, in response to its recent rate reduction and global developments.

Read: Oil’s plunge stalls energy sector deal activity

The bank also said the bulk of the oil slump’s negative effects will strike the Canadian economy in the first half of 2015–and could be more front loaded than it had predicted.

Crude prices, it added, were close to the January projection.

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Staff, with files from The Canadian Press

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