Bank of Canada keeps key rate at 1.0%

The Bank of Canada on Tuesday maintained its key lending rate at 1.0 percent, shrugging off the recent inflation data showing prices rising at the fastest pace in eight years. The move was widely expected by analysts, who see the central bank as remaining cautious in view of uncertainties in the economic recoveries in Europe and the United States. The bank's target for the overnight rate, which is used as the base for many other types of loans, has been at 1.0 percent since September 2010, after three quarter-point increases from the low of 0.25 percent at the height of the economic crisis. The central bank said the Canadian economic expansion "is proceeding largely as projected, although the expected rotation of demand is somewhat slower than had been anticipated." It said household spending remains "solid" and business investment "robust" but that exports are weak due to problems in Canada's big trading partners, and that as a result its monetary policy would remain "very stimulative." A big part of the caution by the Canadian central bank stemmed from the problems in other major economies. "The US economy has grown at a slower pace than expected and continues to be restrained by the consolidation of household balance sheets and slow growth in employment," the Bank of Canada statement said. "While growth in core Europe has been stronger than expected, necessary fiscal austerity measures in a number of countries will restrain growth over the projection horizon." Additionally, the statement said the Japanese economy "has begun to recover from the disasters that struck in March, although the level of economic activity in that country will remain below previous expectations." The central bank said it expects growth in Canada "to re-accelerate in the second half of 2011" and noted its projection for a 2.8 percent expansion for all of 2011, and that if this occurs rates may rise. "To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be withdrawn, consistent with achieving the 2.0 percent inflation target. Such reduction would need to be carefully considered," the statement said. It said consumer inflation "is expected to remain above 3.0 percent in the near term, largely reflecting temporary factors such as significantly higher food and energy prices," but is likely to return to the target range by mid-2012. The central bank said its projection "assumes that authorities are able to contain the ongoing European sovereign debt crisis, although there are clear risks around this outcome."