Bank of Canada key interest rate unchanged

The Bank of Canada left its key interest rate unchanged at one per cent Tuesday and warned of a slowing economy, knocking the Canadian dollar and stock markets lower.

The central bank said it now expects the economy to take a year longer to return to full capacity than it had earlier predicted.

The decision to hold the overnight rate steady followed three consecutive quarter-percentage-point increases in the key rate, which influences the commercial banks' prime lending rate and other short-term interest rates. Observers said it appears the bank may now stand pat for some time.

"This is not just a data-watching central bank that is keeping its powder dry in order to evaluate developments over coming months — this is a central bank that has totally revised its outlook and market guidance," Derek Holt, an economist at Scotiabank, said in a note.

"To us, the BoC is saying they are on hold until late next year. The keys in this regard are the changes to its inflation and output gap estimates."

In their surprisingly gloomy assessment, the Bank of Canada's policy-makers said global and domestic influences are dragging down economic expectations. In particular, the bank foresees a "weaker-than-projected recovery in the United States," amid government spending retrenchment and "difficult" labour markets.

"At this time of transition in the global recovery, with a weaker U.S. outlook, constraints beginning to moderate growth in emerging-market economies, and domestic considerations that are expected to slow consumption and housing activity in Canada, any further reduction in monetary policy stimulus would need to be carefully considered," the central bank's statement said.

The Canadian dollar dropped more than two U.S. cents after the announcement and ended the day down 1.7 cents at 96.91 cents US. The Toronto stock market's S&P/TSX composite index ended trading down 97.5 points, or 0.8 per cent, to 12,570.5.

Forecast scaled back

The central bank said it now believes Canada's economy will likely grow about three per cent this year instead of the 3.5 per cent it had projected in July, and much of this growth took place in the first part of the year.

For next year, the bank predicts growth of 2.3 per cent, six-tenths of a point lower than previously projected, and it forecasts 2012 growth of 2.6 per cent.

"The economic outlook for Canada has changed," the statement observed. "This more modest growth profile reflects a more gradual global recovery and a more subdued profile for household spending."

Bank of Canada governor Mark Carney will provide further information in an economic update Wednesday, but economists do not see the central bank raising interest rates any time soon.

"A sluggish recovery south of the border and softer-than-expected Canadian growth in the second half of 2010 have pulled the Bank of Canada back onto the sidelines," BMO Capital Markets economist Robert Kavcic wrote in a note. "We judge they will remain on hold until May 2011."

Meanwhile, the Conference Board of Canada lowered its forecast for Canada's growth next year, saying domestic spending has cooled and the U.S. economy has weakened.

The Ottawa-based forecaster said Tuesday it now expects Canadian gross domestic product will expand by 2.5 per cent in 2011 — 0.4 percentage point slower than its previous prediction in late September.