Cautious Bank of Canada keeps overnight rate in holding pattern

(December 3, 2002) The Bank of Canada kept a steady hand on its key overnight lending rate today, holding it at 2.75%.

Inflation and uncertainty were cited as two reasons why the cautious central bank did not alter the overnight rate, which was raised to 2.75% on July 16.

“Core and total CPI inflation have remained above the Bank’s 2% target for inflation control, largely as a result of one-off price movements such as the increase in insurance premiums,” said the Bank of Canada in the statement accompanying the announcement.

The Bank also said data suggest Canada’s economic growth in the second half of this year is “coming in lower than previously expected”, primarily because of weakness in the global economy and “geopolitical uncertainties.”

Canada’s economy is expected to grow at a more robust pace in the second half of 2003. Statistics Canada says real gross domestic product grew at a slower rate of 0.8% in the third quarter. Inflation is expected to remain under control, assuming crude oil prices stay at current levels, and the Bank forecasts total inflation of around 2% in the second half of 2002. That would be the middle of the targeted range.

While acknowledging the “substantial” amount of monetary stimulus in the economy, the central bank noted that a tightening of monetary policy will be needed to keep inflation in check.

The interest rate announcement did not surprise economists and analysts, who, in general, predicted the bank would stand pat.

“But, while the policy interest rate was left unchanged, the Bank also reminded markets of its intention to take back monetary stimulus over the medium term — a note of caution that has been consistently echoed in previous announcements,” said RBC Financial Group economist Carl Gomez in an online commentary.

Gomez said the Bank of Canada appears firmly committed to eventually raising rates, likely by April.

TD Bank senior economist Marc Levesque concurs. “Put it all together, and the Bank is serving up all the ingredients for rates to remain unchanged until the spring — below-trend growth for the next three quarters, benign inflationary pressures and significant global economic and geopolitical risks,” said Levesque in his online commentary.

Both economists said the Bank of Canada is much more inclined to raise rates than its U.S. counterpart since the economy in this country is operating much closer to capacity.

This was the last scheduled interest rate policy announcement from the Bank of Canada in 2002. The next rate date is January 21, 2003. Policymakers with the U.S. Federal Reserve Board are to meet Tuesday for their next interest rate meeting.

Filed by Jim MacDonald, Advisor.ca, jmacdonald@advisor.ca.

(12/03/02)