Bank of Canada holds interest rate steady

Recovery will be slower than previously predicted, returning to full capacity by end of 2012: BOC
By David Ljunggren
||Last Updated: 11/05/2010

(Reuters) — Amid uncertainty about the global recovery, a weak outlook in the United States and slower-than-predicted growth in Canada, the Bank of Canada held its benchmark interest rate steady at one per cent in October after three consecutive increases.

And future rate increases will have to be considered very carefully, said the bank in its latest

Monetary Policy Report


"At this time of transition in the global recovery, with a weaker U.S. outlook, constraints beginning to moderate growth in emerging-market economies, and domestic considerations that are expected to slow consumption and housing activity in Canada, any further reduction in monetary policy stimulus would need to be carefully considered," it said.

The central bank  said the Canadian recovery will be weaker than expected and cut its forecast for annualized growth in the third quarter of 2010 to a tepid 1.6 per cent from the 2.8 per cent it predicted in July.

It also cut quarterly forecasts for the subsequent four quarters, predicting greater-than-expected growth would only start in the fourth quarter of 2011. The economy was running below capacity and should return to full capacity by the end of 2012.

Total and core inflation should rise to two per cent by the end of 2012, and risks to the outlook were roughly balanced, said the bank.

The three main upward risks are higher commodity prices; greater than expected improvements in U.S. housing and labor markets; and stronger household spending in Canada.

The three main downward risks are a combination of a persistently strong Canadian dollar combined with disappointing productivity; intensified global deflationary forces; and a sudden weakening in the Canadian housing sector.

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