The Bank of Canada kept its key policy rate at 1 %

The Bank of Canada kept its key policy rate at 1 % on March 6th 2013. It has been unchanged at this level for more than 2 years, marking the longest period way back to the early 1950s that rates have been left untouched.

Many economic gurus had expected the Bank to soften its language among a rash of disappointing industrial reports in recent weeks ; nonetheless Governor Carney has cautioned against over-emphasizing shorter-term data, and today’s statement echoed that view by addressing contemporary feeble readings in a considerable number of signals as "recent volatility".

While the Bank did maintain its previous direction the next move will probably be a rate jump, one way in which the Bank did take a more dovish stance was by way of what it didn’t say this time, namely the warning it issued in Jan that higher rates could be needed if consumers continued to accrue debt. The Bank referred to up to date developments in the housing sector as "constructive", and reiterated its expectancy that household credit growth would continue to moderate, with the household debt-to-income ratio stabilizing near current levels.

This was an indication the Bank is starting to become more content with consumer borrowing and the housing market.

In spite of the weak, though principally anticipated reading for Canadian business expansion in Q4 of 2012, the Bank claimed it still expects Canadian commercial growth to pick up through 2013 driven by "solid business investment" and "a recovery in exports".

The Bank said its expectations for overall fiscal drag coming from the U.S. Over the next 2 years were principally unvaried, though it’s now certain to be more front-loaded owing to sequestration spending cuts. This, combined with the puny handoff for expansion from late 2012 into 2013, could mean a downgrade to the Bank’s current prediction for growth of 2 percent this year ; however that forecast may not be revisited until the Bank’s next Monetary Policy Report slated for release on April 17th.

Inflation has recently been lower than formerly expected, and is expected to stay subdued in the months ahead before gradually rising to get to the Two % target "over the projection horizon", which would be sometime in 2014.

All that said the base line remains unchanged, namely that industrial expansion is expected to stay modest but positive, consistent with low inflation and low interest rates.

At the exact same time, expectations for inflation remain extremely well anchored, so that the Bank will be in no hurry to raise interest rates anytime soon. At this point, the first such policy move not likely until 2014 at the earliest, and even that assumes that some of the more recent developments are simply a transient soft patch, which remains to be seen. It has been unvaried at this level since the start of June 2012.