Bank of Canada Holds Interest Rates at 1%

As expected, the Bank of Canada announced this morning that it was maintaining the current 1 percent overnight target rate. In the statement, the Bank noted that the global recovery is proceeding “broadly as expected” and the Bank feels that underlying inflation remains “subdued”.

The announcement does note that commodity prices have eased slightly but are still expected to remain at elevated levels. The higher prices and continued demand for Canada’s resource exports from the emerging economies imply a threat for inflation in the longer term and the Bank will continue to watch for an increase in inflationary pressures on the economy.

The Bank also noted that expansion in Canada continues to unfold as expected. Growth for the first quarter came in at 3.9 percent but this is expected to ease later in the year.

“While underlying inflation is relatively subdued, the Bank expects that high energy prices and changes in provincial indirect taxes will keep total CPI inflation above 3 per cent in the short term. Total CPI inflation is expected to converge with core inflation at 2 per cent by the middle of 2012 as excess supply in the economy is gradually absorbed, labour compensation growth stays modest, productivity recovers and inflation expectations remain well-anchored.”

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