Province
OTTAWA — Citing lower inflation and a slowing economy, the Bank of Canada held its key interest rate steady yesterday and sounded a much softer tone on the prospect of future rate hikes.
Analysts weren’t surprised the bank left its key overnight rate unchanged at 3.25 per cent.
Inflation slowed dramatically in April, global economies remain weak and the dramatic jump in the value of the loon is threatening exports.
All this suggests the central bank could hold rates steady for the rest of the year, analysts said.
“What caught my attention . . . was the sharp contrast between the hawkish tone in the bank’s Monetary Policy Report [in April] and the rather dovish or tame tone in this statement,” said Marc Levesque, senior economist with TD Financial Group. That initially surprised the loon, which weakened during early trading before regaining some strength.
After boosting rates five times in the past year, most recently in mid-April, the bank had been warning it intended to continuing raising borrowing costs to choke off inflation.
However, central bankers were surprised when the April Consumer Price Index, released last week, showed a dramatic drop in inflation. The core rate fell by 0.3 percentage points to 2.1 per cent — almost exactly where the bank likes it.
That seems to have changed the bank’s thinking. “Data . . . indicate that both core and total CPI inflation declined in April more than expected,” yesterday’s policy statement noted.
That, combined with economic weakness around the globe — especially in the U.S. — the SARS outbreak and a spike in the loon contributed to slower growth here, the bank added.
Economist Ted Carmichael of J.P. Morgan said that will likely prevent further rate increases, possibly for the rest of the year.
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