Tuesday, December 4, 2012

Canada holds rate steady, maintains tightening bias

    The Bank of Canada (BOC) held the target for its overnight rate unchanged at 1.0 percent, as expected, and maintained its tightening bias, saying that it will have to raise interest rates at some point to ensure that inflation does not exceed its target.
    "Over time, some modest withdrawal of monetary policy stimulus will likely be required, consistent with achieving the 2 percent 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," the bank said in a statement.
    The BOC, which has held its overnight rate steady since September 2010, said the global economy was unfolding broadly as the bank had projected in October with the U.S. economy progressing but also held back by uncertainty over budget talks. Europe remains in recession but China appears to be stabilizing and global inflationary pressures are subdued due to excess capacity.
    "Global financial conditions remain stimulative, though vulnerable to major shocks from the U.S. or Europe," the BOC said.
    The BOC has maintained since April that it will have to raise rates at some point, a hawkish tone that is in stark contrast to central banks in most other advanced economies that are stimulating economic growth.

    Canada's economy was weak in the third quarter due to temporary disruptions in the energy sector, and although underlying momentum is "slightly softer than previously anticipated" the bank said it expects the pace of growth to pick up through 2013, driven by consumption and business investment.    Canada's Gross Domestic Product rose by 0.1 percent in the third quarter from the second for annual growth of 1.5 percent, down from 2.8 percent in the second quarter.
    Housing activity had started to decline from historically high levels and growth in household credit had slowed, but the bank said it was still too early to determine whether this moderation would be sustained.
    "The challenges include the persistent strength in the Canadian dollar, which is being influenced vby safe haven flows and spillovers from global monetary policy," the bank said.
    Canada's October headline inflation rate was steady for the third month in a row at 1.2 percent and the bank said it expected the headline and core rates to rise and return to 2 percent over the next 12 months as the economy gradually absorbs the small degree of slack.



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