Wednesday, September 5, 2012

Canada holds rate, repeats it may have to raise rates

    The Bank of Canada (BOC) held its target for its overnight interest rate unchanged at 1.0 percent, as widely expected, and repeated that it may have to it tighten policy if economic expansion continues in order to keep inflation close to target.
    "In Canada, while global headwinds continue to restrain economic activity, underlying momentum remains at a pace roughly in line with the economy's production potential," the BoC said in statement, adding that it expects growth to pick up through 2013 with consumption and business investment to remain the main drivers.
    Canada's GDP expanded by 2.50 percent in the second quarter from the same 2011 quarter, up from 1.8 percent in the first quarter. The BoC expects 2.1 percent growth in 2012 and 2.3 percent in 2013. 
    The bank noted that core inflation had been softer than expected in recent months but it, along with CPI inflation, is expected to return to 2 percent in the next year. 
    The BoC targets inflation of 1-3 percent, with a midpoint of 2.0 percent.

    Consumer Price Inflation in Canada has been coming down rapidly in recent months, hitting 1.3 percent in July after peaking at 3.7 percent in May last year.
    In July the BoC said it expected CPI inflation to remain noticeable below its target due to the fall in oil prices but in today's statement it said that prices for oil and other commodities produced by Canada had increased since July, despite the slower economic momentum.
    "To the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the 2 per cent inflation target over the medium term," the BoC said.
    The BoC has used the same tightening language since April and on Aug. 22 Governor Mark Carney also used the same phrase.
    The BoC has held its key interest rate at 1.0 percent since September, 2010.



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