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BOC Left Policy Rate at 1%, Economic Conditions Suggested Pause Would Prolong Print E-mail
Special Reports | Written by | Mar 06 13 16:51 GMT

BOC Left Policy Rate at 1%, Economic Conditions Suggested Pause Would Prolong

The Bank of Canada left the overnight rate at 1%, with the Bank Rate at 1.25% and the deposit rate at 0.75%. The policy statement was dovish as policymakers saw less urgency in rate hike than previously. The tone of the statement was similar to the previous one with the broad outlook for the Canadian economy similar to January's. Policymakers expected domestic growth would gain momentum through 2013 amid better household spending and business investment and exports.

The central bank did not show much worry about the sluggish GDP growth in 4Q12. Nevertheless, it stated that the 0.6% annual growth rate was driven by "solid growth across most domestic components of GDP" which was "offset by a sharp reduction in the pace of inventory investment". Exports would improve. Yet, "the persistent strength of the Canadian dollar" is among key factors capping the recovery "below their pre-recession peak until the second half of 2014".

Concerning inflation, policymakers noted that it has been "more subdued" than January's forecast due to "weaker core inflation and lower mortgage interest costs, which were only partially offset by higher gasoline prices". Core and headline CPI should" remain low in the near-term before rising gradually to reach +2% later.

On the monetary policy, the BOC explained the decision of the "inaction". "Continued slack in the Canadian economy, the muted outlook for inflation, and the more constructive evolution of imbalances in the household sector" justified monetary policy to stay accommodative for "for a period of time". While the central bank would likely maintain the status quo in coming months, the next move should still be tightening. At the final paragraph, the statement reiterated that "after which some modest withdrawal will likely be required, consistent with achieving the 2% inflation target".

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