Bank of Canada keeps benchmark interest rate at 0.5%

Canada's central bank stood pat today, electing to keep its benchmark lending rate at 0.5 per cent.

The Bank of Canada's rate, known as its target for the overnight rate, affects what Canadian borrowers and savers are offered from commercial banks on their loans and investments.

Broadly speaking, the bank cuts rates when it wants to stimulate the economy, and hikes rates when it wants to pump the brakes on inflation. 

After standing on the sidelines for years, the bank unexpectedly cut its benchmark rate twice last year in an attempt to stimulate a Canadian economy waylaid by low oil prices.

• January 2015: Bank of Canada shocks market with interest rate cut

Since then, the economy has showed signed of improvement, however, as the cheap loonie has helped manufacturers and exporters, and oil prices have stabilized around the $40 level in recent months.

In January, Canada's gross domestic product grew by its biggest amount in more than two years, official data showed last month. That helps explain the new cautiously optimistic outlook from the central bank's decision-makers.

"It does appear that the positive forces at work in the economy are starting to outweigh those that are negative," the bank said in its statement Wednesday. "First-quarter GDP growth appears to have been unexpectedly strong."

The Canadian dollar reacted positively to the news, erasing earlier losses of about a third of a cent to trade hands virtually unchanged on the day, at 78.35 cents US.

While keeping rates steady for now, the bank hiked its forecast of how it expects the economy to perform this year.

In January, the bank forecasted 1.4 per cent growth in the economy in 2016. That figure has been increased to 1.7 per cent. For next, year, the bank expects 2.3 per cent growth.

The bank deciding to stand pat on the rate again was exactly what economists were expecting. But at least one said Wednesday the door is open to rate hikes down the line. 

Too good to be true?

Strong economic indicators like growing GDP and adding jobs are nice, CIBC economist Benjamin Tal said in an interview, but "the main issue is to what extent it's too good to be true.

"To what extent can we sustain this growth?"

Others took a bleaker view.

"We still think that the bank is being overly optimistic about economic growth prospects," David Madani at Capital Economics said.

"We think the economy will struggle over the rest of this year due to falling business investment and a slower pace of hiring," Madani said, adding he expects the economy will only grow by about one per cent in 2016. 

"If we are correct, this should prompt the Bank of Canada to cut interest rates later this year," Madani said.

Fellow economist Brian DePratto, of TD Bank, had a similarly gloomy take, telling clients in a note that "even with the upgraded outlook, the bank's view is best characterized as cautious, particularly for the near term.

"We remain comfortable in our view that it will be some time before we see any movement in the policy interest rate," DePratto said.

The press conference to discuss the bank's quarterly Monetary Policy Report — which was also released Wednesday — was Poloz's first chance to speak since the recent federal budget.

Infrastructure spending

On March 22, the new Liberal government outlined a spending plan that will plunge Ottawa's books deep into the red, but devote part of that spending to infrastructure projects that should boost the economy. 

"The fiscal measures announced in the March federal budget will have a notable positive impact on GDP," the bank said.

Indeed, the deficit spending in the budget appears to be the main reason for the central bank's cautious optimism. "They would have downgraded their growth forecast, and only the budget stimulus prompted the upgrade," BMO economist Doug Porter said.