Canada: Central Bank maintains interest rate as Canadian dollar edges higher
April 12, 2011
At its latest meeting held on 12 April, the Bank of Canada (BoC) left the target for the overnight rate unchanged at 1.00%, in a move widely anticipated by the market. The Bank justified its decision by pointing to the continued appreciation of the Canadian dollar, which exerts downward pressure on inflation through ?weaker-than-expected net exports and larger declines in import prices?. According to the Bank of Canada, the global outlook remains solid as economic growth strengthens in the major developed economies. However, the sovereign debt crisis in the Eurozone (augmented by Portugal's recent bailout request) still weighs on the speed of global economic recovery. Moreover, disruptions to the supply chain in advanced economies, caused by the recent earthquake that hit Japan on 11 March, will have temporary negative spillovers to economic growth. The Bank further stated that a number of temporary factors will boost inflation to around 3.0% in the second quarter before inflation converges to the 2.0% target by the middle of 2012. The inflation spike reflects the sharp increases in energy prices and changes in provincial indirect taxes. Core inflation has fallen further in recent months but the Bank expects it to rise gradually to 2.0% by the middle of 2012, as ?excess supply in the economy is slowly absorbed, labour compensation growth stays modest, productivity recovers and inflation expectations remain well-anchored.? Finally, the Bank expressed its concern regarding the recent strength of the Canadian dollar, which is expected to worsen the terms of trade for exporters and create ?headwinds for the Canadian economy?. The next policy meeting is scheduled for 31 May.