Bank of Canada keeps benchmark interest rate steady at 1%

Bank of Canada keeps benchmark interest rate steady at 1%

Bank of Canada keeps benchmark interest rate steady at 1%

The bank said it expects inflation to rise to two per cent by the end of next year - a little later than expected, because of strength in the Canadian dollar.

"While less monetary policy stimulus will likely be required over time, the governing council will be cautious in making future adjustments to the policy rate", the central bank said. "Given higher overall debt levels, [household spending] is expected to be more sensitive to interest rate changes than in previous cycles". It added that policy makers would analyze incoming data to assess the household sector's sensitivity to higher rates, and the dynamics underlining wage growth and inflation. The persistence of labor-market slack, it said, suggests there is more room for the economy to grow without triggering a material advance in inflation.

Wednesday's move follows quarter-percentage-point increases in July and September.

The bank said recent mortgage rule tightening would dampen Canada's once red-hot housing market further, and warned that a drop in house prices in Toronto or Vancouver could douse residential investment and consumption in those areas and have "modest direct spillovers" to the rest of Canada.

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The global and Canadian economies are progressing as outlined in the July MPR. "We think growth 2% next year is pretty good".

The Bank said the current level is appropriate given the risks and uncertainties the country is facing, in particular those related to the renegotiation of the North American Free Trade Agreement.

"After the excitement of the summer, Governor Poloz engaged in something of a stock-taking exercise, with today's Monetary Policy Report providing important insight into his thinking in the wake of this summer's back-to-back rate hikes", Brian DePratto, senior economist at TD Economics, said in a note to investors.

"Substantial uncertainty" surrounding NAFTA talks is looming large over the Bank of Canada. Exarhos said the Canadian dollar is expected to weaken to 77 cents U.S.in the early part of next year.

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