Tuesday, July 19, 2011

Bank of Canada Holds Rate at 1%

The Bank of Canada held its key interest rate steady Tuesday, as expected, but hinted more strongly than before that it would resume hiking soon as the sturdy domestic economy contrasts with rising risks globally.

Keeping its overnight rate at 1 percent, the bank said core inflation will reach its 2 percent target earlier than it had anticipated and that it sees economic growth speeding up in the second half of this year after a second-quarter slump.

Canada’s central bank became the first in the Group of Seven advanced economies to tighten monetary policy following the global financial crisis, hiking three times from June to September last year.

It has been on pause since then, but with an eye on threats abroad such as the weakening U.S. economy and the European sovereign debt crisis that threaten to derail growth at home.

The bank’s comments were more hawkish than markets expected, pushing the Canadian dollar to a two-month high against the U.S. dollar.

The median forecast of 37 analysts in a July Reuters poll was for a resumption of rate increases in the fourth quarter, which means either at the Oct. 25 or Dec. 6 rate decision.

But the bank did flag several caveats to hiking rates and advised that its projections assume that European leaders will be able to contain the sovereign debt crisis.

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