Bank of Canada holds key lending rate at 4.25 per cent
Ottawa (CP) – The Bank of Canada kept its key lending rate unchanged at 4.25 per cent Wednesday as inflation appeared to be in check, but warned there could be fallout from the economic slowdown south of the border.
While struggling exporter continue to drag on Canada’s economy, the central bank said the country’s economic performance is meeting expectations despite cooling a little more quickly than the bank had earlier predicted.
“The bank continues to expect the Canadian economy to operate at about its production potential, with total CPI (consumer price index) inflation returning to the two per cent target in the second half of 2007,” the bank said in a statement.
Among the major factors likely to affect the economy, “the main downside risk is that U.S. household demand could slow more rapidly than expected,” the bank said in a statement.
Economists said the central bank has taken a tougher stance in its latest announcement, signaling a more serious economic threat might well be brewing in the United States.
“The tone was interesting,” said TD Bank economist David Tulk. “I think the market expected a little bit more of a dovish tone.”
A high Canadian dollar combined with a slowing U.S. economy cut Canada’s exports by billions of dollars in first two quarters of 2006, but strong commodity prices, particularly for oil and natural gas, have mitigated the impact of weak exports somewhat, the bank said.
The loonie climbed 0.47 per cent of a U.S. cent Wednesday to $90.42 US.
However, Tulk said the U.S. economy could slow more quickly than expected, which could prompt the bank to lower its key lending rate in 2007.
Darcy Briggs, portfolio manager at Bissett Investment Management, said consumers can expect interest rate decreases as long as the U.S. economy continues to slow.
“I see that a definite possibility on both sides of the border,” he said.
Those looking to borrow money can at least a stable lending environment for the remainder of this year, said BMO Nesbitt Burns economist Douglas Porter.
In a researcher note, Porter said the central bank has suggested that rates “stay right where they are for some time yet.”
So far this year, the domestic demand for housing and household goods has offset weakened exports to the U.S., the Bank of Canada noted.
The Bank said it will keep a close eye on Canada’s booming housing market, which drove inflation higher than expected in the second quarter of 2006. Alberta’s housing market continues to fuel the national boom as housing prices in Calgary, Edmonton and the oilsands center of Fort McMurray continue to soar.
Porter said the Canadian housing market has only just appeared on the central bank’s radar screen.
“This is the first time the bank has noted domestic home prices as an upside risk,” he said.