The Bank of Canada held its benchmark interest rate steady at one per cent Thursday, the 12th consecutive time in the bank’s schedule of announcements that its key lending rate has gone unchanged.
That’s the longest period of steady rates since the 1950s. The last time the bank made a rate move was September 2010.
However, the language used by the central bank hints that rate hikes could be coming in the near future.
“Recent developments suggest that the outlook for the Canadian economy is marginally improved from the January [Monetary Policy Report],” the bank said in a statement.
“With tentative signs of stabilization in European bank funding and sovereign debt markets, conditions in global financial markets have improved and risk aversion has decreased.”
Policy makers around the world have been watching the European debt situation closely. A disorderly default by Greece would have rattled the global financial system and raised the likelihood more stimulus would be required.
The bank’s previous statement in January took a far more cautious tone, suggesting that a “recession in Europe is now expected to be deeper and longer than the bank had anticipated.”
Recent developments in Greece’s efforts to refinance its debts have decreased the likelihood of a messy default.
Global uncertainty has decreased, central bank says
The banks’ statement suggested that unless a shock comes to the global financial system, the excess stimulus created by low interest rates could soon be removed.
“Heightened uncertainty around the global economic outlook has decreased,” the statement said.
Low interest rates designed to spur economic activity have helped the economy remain resilient during a global downturn.
However, persistently low rates have drawbacks. The bank remains concerned Canadians are adding too much debt to their personal balance sheets.
“Canadian household spending is expected to remain high relative to GDP as households add to their debt burden, which remains the biggest domestic risk.”
Rate hike unlikely in near term, analysts say
CIBC chief economist Avery Shenfeld says that despite a better economic outlook for Canada and the world, he doesn’t expect rates to change any time soon.
“Nothing in here [signals] a rate hike coming soon, but markets will pick up on the slightly improved change in tone on the economy, and might move forward the implied date for the first rate hike,” he said in a statement.
Likewise, BMO economist Sal Guatieri also expects rates on hold for some time, and suggests the likelihood of a rate cut has diminished.
“While rates are unlikely to increase in the near term, the next move is more likely to be up rather than down, and could well emerge sooner than we currently anticipate,” he said in an e-mail.
Pressure on prices
Tensions in the Middle East and a stronger global economy have pushed commodity prices up, particularly oil. The Bank of Canada statement said these higher costs could threaten economic growth around the world.
“Commodity prices are higher than anticipated, supported by improved global economic conditions and a geo-political risk premium on oil,” the bank’s statement said.
“If sustained, the latter could ultimately dampen the improvement in global economic momentum.”
The bank did concede that inflation has recently been higher than expected, but maintained a 2 per cent inflation target.
The latest inflation reading showed prices rose 2.5 per cent from a year earlier in January.
The Canadian dollar rose on the statement and higher oil prices, adding 0.69 of a cent to 100.87 cents US. Currency traders buy the loonie in anticipation of future rate hikes that make the Canadian dollar a more attractive investment.
The next Bank of Canada interest rate decision will come April 17.