Canada Keeps Key Rate 1%, Sees Diminished Need for Increase

Sept. 7 (Bloomberg) — The Bank of Canada kept its main interest rate unchanged for an eighth meeting and said there is a “diminished” need for an increase as Europe’s fiscal crisis and a slow U.S. rebound hobble the global recovery.

The Ottawa-based central bank left the target for overnight loans between commercial banks at 1 percent, where it has been since last September, as forecast by all 27 economists surveyed by Bloomberg News.

The world’s 10th largest economy shrank in the second quarter as a strong dollar and weak U.S. demand weighed on Canada, which depends on exports for one-third of its output. Companies such as aircraft and train maker Bombardier Inc. of Montreal have said they are cautious about major new spending projects because of signs of global weakness.

“In light of slowing global economic momentum and heightened financial uncertainty, the need to withdraw monetary policy stimulus has diminished,” policy makers led by Governor Mark Carney, 46, said in a statement today.

The Bank of Canada reiterated today it expects economic growth to resume in the second half of this year, led by business investment and consumer spending. Output shrank at a an annualized 0.4 percent rate in the second quarter, which the bank said was “largely due to temporary factors.”

Future ‘Pushed off’

“Given its outlook that Canada’s economy will pick up somewhat in the second half of the year, it believes it doesn’t need to inject further stimulus,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “There is still a sense that rates will need to go up in the future, but that future is pushed off.”

The Canadian dollar gained 0.1 percent to 98.92 cents per U.S. dollar at 9:34 a.m. in Toronto, from 99.05 cents yesterday. It touched 99.66 cents yesterday, the weakest since Aug. 11.

The bank’s previous announcement in July said “some of the considerable monetary policy stimulus currently in place will be withdrawn” as the economy recovers. Today, policy makers gave a list of challenges facing the economy, including the country’s strong dollar and the need for “significant initiatives by European authorities” to boost investor confidence.

The European Central Bank and the Bank of England have interest-rate decisions tomorrow, and economists predict the U.K. rate will remain 0.5 percent and the ECB’s at 1.5 percent. In the U.S., the Federal Reserve pledged Aug. 9 to keep its benchmark rate at a record low at least through mid-2013 to revive a recovery that’s “considerably slower” than
anticipated.

Drag on Exports

Slower global growth will be a drag on Canada’s exports and moderate inflation, the Bank of Canada said today. “Net exports are now expected to remain a major source of weakness, reflecting more modest global demand and ongoing competitiveness challenges, in particular the persistent strength of the Canadian dollar,” the bank said.

“We’ve been very careful in how we’ve been planning our capital expenditures,” Guy Hachey, Bombardier’s chief operating officer for aerospace, said on an Aug. 31 earnings call.

The Bank of Canada’s mandate is to set policy aiming inflation at a 2 percent annual pace. Consumer prices rose 2.7 percent in July from a year earlier, the eighth month it was above target.

Some investors resumed betting that the Bank of Canada will cut interest rates after Statistics Canada reported Aug. 31 that the economy shrank, Brazil unexpectedly cut rates last week and Switzerland yesterday offered unlimited funds to cap a rise in the franc. In the U.S., which buys three-quarters of Canada’s exports, a report last week showed job creation
stalled in August.

Rate Declines

Goldman Sachs Group Inc. said yesterday the Bank of Canada will cut its rate to 0.5 percent by the end of the year, New York-based economist Andrew Tilton wrote in a note to investors.

Finance Minister Jim Flaherty said last week that Canada has more flexibility than the U.S. central bank. “With respect to the limited tools available given the rate presently in place by the Fed in the U.S., we have more room to move in Canada than there is to move in the United States,” Flaherty said Aug. 31 in Toronto.

Flaherty also said that the economy is “sound and sustainable.”

“I’m not so sure,” a rate cut is needed, Suncor Energy Inc. Chief Executive Officer Rick George said in an interview yesterday at Bloomberg’s headquarters in New York. “Rates are pretty low right now. We in the west, particularly in Alberta and Saskatchewan, are facing inflation.”

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net

To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net David Scanlan at dscanlan@bloomberg.net

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