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Bank of Canada maintains overnight rate target at 1 per cent

OTTAWA The Bank of Canada on Tuesday said it is keeping its trendsetting interest rate on hold and acknowledged that risks from the European crisis are leading to a "a sharp deterioration" in global financial conditions.

The central bank kept its lending rate at a near-historic low of one per cent where it has been since September 2010 and pointed to weaker expectations for global economic growth.

"Some of the risks around the European crisis are materializing and risks remain skewed to the downside. This is leading to a sharp deterioration in global financial conditions," the bank said in its statement accompanying the rate decision.

"The outlook for global economic growth has weakened in recent weeks."

Many economists have pulled back on their forecasts for a rate increase before the end of the year, while others are now speculating rates could actually come down if global uncertainty continues.

Tuesday's rate decision comes as Finance Minister Jim Flaherty is joining his G7 counterparts on a conference call to discuss Europe's debt crisis and the fallout within the region's banking sector. Bank of Canada governor Mark Carney was also expected to take part in the talks, along with other G7 central bankers.

"The euro zone is slowing and has now affected Germany and France, the so-far more resilient economies in the euro zone," Otto Waser, chief investment officer at Research & Asset Management AG in Zurich, told Bloomberg Television.

"We see some policy response emerging. We're going to be talking more rescue measures in Europe. I don't think that's going to really stabilize the economies."

On Wednesday, the European Central Bank will meet to decide on its key interest rate, ahead of critical meeting of European leaders on June 28 and 29, called to discuss the debt and banking crisis.

In Canada, economic growth in the first quarter of this year was just 1.9 per cent, on an annualized basis, matching the fourth-quarter increase, as consumer spending slowed to a three-year low

On a monthly basis, gross domestic product edged up 0.1 per cent in March from February.

Source: MyMortage news letter
The Bank of Canada had forecast growth in the first three months of 2012 at 2.5 per cent.

"While the U.S. economy continues to expand at a modest pace, economic activity in emerging-market economies is slowing a bit faster and a bit more broadly than had been expected," the bank said Tuesday.

"More modest global momentum and heightened financial risk aversion have reduced commodity prices."

The central bank acknowledged that growth was "slightly slower than expected" in the first quarter, "underlying economic momentum appears largely consistent with expectations."

"In particular, housing activity has been stronger than expected, and households continue to add to their debt burden in an environment of modest income growth."

However, the bank slightly rephrased its view of excess capacity in the economy, characterizing it as "a small degree," rather than the "somewhat smaller" than anticipated wording in its previous rate statement.

"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 stimulus may become appropriate."
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