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Bank of Canada Leaves Rate Unchanged

The Bank of Canada is maintaining its key target rate at 3 percent, citing the weakening US economy, turbulence on a global basis and continuing price hikes for commodities. The latter of the three conditions is causing increases in Canadian trade and national income.


July 15, 2008
By AgWeb.com/The Farm Journal

July 15, 2008

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 3 percent. The operating band for the overnight rate is unchanged, and the Bank Rate remains at 3 1/4 percent.

"Three major developments are affecting the Canadian economy: the protracted weakness in the U.S. economy; ongoing turbulence in global financial markets; and sharp increases in many commodity prices. The first two developments are evolving roughly in line with expectations in the April Monetary Policy Report. However, commodity prices are continuing to outstrip earlier expectations. This has led to further increases in Canada's terms of trade and real national income, and has altered the outlook for global and domestic inflation," they add.

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Although Canadian economic growth in the first quarter was weaker than expected, final domestic demand continues to expand at a solid pace, states the Bank. "The economy is judged to have moved into slight excess supply in the second quarter of this year; excess supply is expected to increase over the balance of the year. High terms of trade, accommodative monetary policy, and a gradual recovery in the U.S. economy are expected to generate above-potential growth starting early next year, bringing the economy back to full capacity around mid-2010. Canadian GDP is projected to grow by 1.0 percent in 2008, 2.3 percent in 2009, and 3.3 percent in 2010," they continue.


Total CPI inflation over the next year is expected to be much higher than projected at the time of the April Report. Assuming energy prices follow current futures prices over the projection period, total CPI inflation is projected to rise temporarily above 4 percent, peaking in the first quarter of 2009. As energy prices stabilize and with medium-term inflation expectations remaining well anchored, total inflation is then projected to converge to the core rate of inflation at the 2 percent target in the second half of 2009. Core inflation is projected to remain well contained and broadly in line with earlier expectations, averaging close to 1.5 percent through the third quarter of this year and then rising to 2 percent in the second half of 2009.

"The three major developments affecting the Canadian economy pose significant upside and downside risks to the Bank's base-case projection. Weighing the implications of these, the Bank views the risks to its base-case projection for inflation as balanced," they continue. "Against this backdrop, the Bank judges that the current level of the target for the overnight rate remains appropriate. The Bank will continue to monitor carefully the evolution of risks, together with economic and financial developments in the Canadian and global economies, and set monetary policy consistent with achieving the inflation target over the medium term."