Julian
Beltrame, THE CANADIAN PRESS
OTTAWA
- The Bank of Canada stuck to its guns on interest rates Wednesday, holding the
overnight rate at three per cent despite acknowledging that both inflation and
the economy are weaker than previously projected.
The
central bank's decision to stay on the sidelines for the third consecutive
announcement date had been widely predicted, but many economists were surprised
governor Mark Carney didn't have a more "dovish" tone in his
accompanying statement.
"He gave only the barest of scraps
to the doves ... given the fact we've had one of the weakest half years for the
economy since the (early) 1990s," said Douglas Porter, deputy chief
economist with BMO Capital Markets.
"There
is absolutely no signal here whatsoever they are preparing to cut rates (in the
future)."
Scotia
Capital economist Derek Holt, who had urged the bank to lower its key interest
rate to spur borrowing and boost the economy, was even more blunt, calling
Carney's language on the economy as bordering on the "Pollyannish."
"I think they are misjudging the
balance of growth and inflation risks here, signalling that domestic demand is
strong when it has been weakening for a year now and the cracks are showing up
on every category."
Last
week, Statistics Canada reported the economy had grown a paltry 0.3 per cent
during the April-June quarter, half a point less than bank governor Mark Carney
forecast last month.
And the
statistical agency said the Canadian economy experienced a much worse winter
than first thought, contracting by 0.8 per cent instead of the 0.3 per cent
decline initially reported.
Moreover,
Canada's economy has gone from producing jobs to shedding them, losing 55,000
workers in July.
But in
a one-page statement, the bank said: "In Canada, domestic demand has
slowed modestly but remains strong. Overall, the level of economic activity is
slightly lower than expected in July but still close to the economy's
production capacity."
Holt
said the bank's reluctance to acknowledge the economic deterioration since its
last forecast in July may stem from having been
burned several times before on its forecasts - as have most other institutional
and private-sector economists.
And
with a federal election call expected later this week, the bank may not have
wanted to send a strong signal about downside risks to growth, he said.
The
market's reaction, boosting the Canadian dollar almost a cent to 94.54 cent
U.S. in early trading, was an indication that many expected a clearer signal from Carney on future
interest rate cuts.
But the
bank gave no so hints.
The
bank said energy prices had moderated since its July outlook, with the
beneficial impact of reducing inflationary pressures and dragging down the
Canadian dollar, which should help manufacturers and exporters going forward.
However,
the statement warned that energy prices remain volatile because of tight
inventories, suggesting the Carney was not willing to stake a switch in
monetary policy on oil remaining at the current US$110 a barrel levels, down
from the mid-US$140s at the time of the last rate decision.
The
bank reiterated it expects inflation to return to its two per cent target in
the second half of 2009, but said lower oil prices have reduced the risk of a
temporary spike taking the price index above four per cent by the end of the
year.
Inflation
currently stands at 3.4 per cent.
The
bank said the economy remains vulnerable to U.S. weakness and tight credit
conditions that could further drag down demand for Canadian exports.
"Given
these developments, the bank judges that the current level of the target for
the overnight rate remains appropriately accommodative," it said.
Porter
said the bank may feel that having chopped 1.5 percentage points from the
overnight rate since December, it has cut interest rates deep enough.
The bank's next interest rate decision
will be Oct. 21.
© The Canadian Press, 2008