Canada keeps key lending rate at 1pc

January 23, 2014 - 12:14:57 am
OTTAWA: The Bank of Canada kept its key lending rate at one percent yesterday, as inflation drops further below its two percent target.

The central bank also hinted at a possible drop in the overnight rate if the economy stays flat, blaming “significant excess supply in the economy and heightened competition in the retail sector.” 

Canada’s inflation remains stubbornly low, and was last recorded in November at only 0.9 percent.

“The path for inflation is now expected to be lower than previously anticipated for most of the projection period,” the bank said.

November marked the seventh month in 13 in which the Canadian government statistical agency’s Consumer Price Index increased less than one percent, in year-on-year terms.

The Bank of Canada now predicts inflation will return to two percent “in about two years,” once retail competition has normalized.

Prices have remained low following a recent influx of American discount retailers including Target and while excess capacity in the economy is absorbed.

At the same time, global growth is predicted to strengthen, lead by a bounce in the US economy, the bank said. “The improving US outlook is affecting global bond, equity, and currency markets,” the bank noted.

In Canada, growth improved in the second half of 2013, but exports and business investment have not turned around as expected.

The central bank revised its growth forecast slightly, up two percentage points in 2014 and down two percentage points in 2015, to 2.5 percent in both years.

It said stronger US demand, as well as the recent depreciation of the Canadian dollar to US$0.90, “should help to boost exports and, in turn, business confidence and investment.”

The bank’s overnight interest rate has remained unchanged at the current near-record low of one percent since September 2010.