Bank of Canada holds steady

The Bank of Canada is keeping its benchmark lending rate at a record low of 0.25 per cent, reiterating on Tuesday its conditional commitment to hold rates steady until the middle of this year.

Although it held the overnight lending rate steady, the bank acknowledged the recovery appears to be proceeding at a better pace than it had anticipated.

"The level of economic activity in Canada has been slightly higher than the bank had projected in its January Monetary Policy Report," the bank said in announcing the rate decision.

"Conditional on the current outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target."

The Canadian economy grew at a strong five per cent pace in the fourth quarter of 2009, Statistics Canada reported Monday. That's well above the 3.3 per cent pace the central bank was expecting for the period, and robust growth like that makes it likely that the bank will move to hike rates and rein in inflation sooner rather than later.

After shrinking by 2.6 per cent in 2009, the bank projects that the economy will grow by 2.9 per cent in 2010 and 3.5 per cent in 2011.

In its statement, the bank repeated its mild concern over the risk that the elevated Canadian dollar presents to the recovery.

"On the downside, the main risks are a more protracted global recovery and persistent strength of the Canadian dollar," the bank said.

'Hawkish tone'

Despite the neutral decision, "there was a definite hawkish tone to the bank’s economic and inflation assessments, particularly for the latter," BMO economist Michael Gregory noted.

He also noted that the bank had tellingly removed a boilerplate phrase indicating it reserves the right to operate with flexibility. "This suggests that whatever low odds the bank was previously attaching to further easing have now fallen so low as to no longer warrant mention," Gregory noted.

He expects the central bank will hike its benchmark lending rate to 0.5 per cent when it meets on July 20.

RBC economist Dawn Desjardins forecast Tuesday that the central bank would raise rates by an entire percentage point in the second half of 2010.

The bank is set to release its next decision on interest rates on April 20. It will then meet again on June 1.