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Interest rate left unchanged at 1 per cent
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Interest rate left unchanged at 1 per cent.
OTTAWA — The Bank of Canada is hinting that the days of super-low interest rates may be nearing an end, although it is keeping its powder dry for at least another month or so.
Despite issuing the most hawkish statement since September 2010, the central bank's interest setting council decided to keep the trendsetting target rate at one per cent for at least until June, but issued a clear signal Tuesday it is getting impatient with leaving borrowing costs so cheap.
"In light of the reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the two per cent inflation target over the medium term," the council wrote Tuesday in an accompanying statement.
Bank governor Mark Carney has recently cited "firmer" economic conditions and his concerns that low interest rates are luring too many Canadians to borrow beyond their means.
In Tuesday's announcement, he made clear that inflation is more of a concern than he previously thought, and that the economy is doing better, both signals that a tightening cycle -- even if a modest and brief one -- is approaching.
The bank now says the Canadian economy will likely expand by 2.4 per cent this year -- four-tenths of a point faster than in its January forecast -- and will return to full capacity in the first half of 2013, three-to-six months ahead of pace. Pushing growth forward means the economy will settle in closer to its long-germ potential sooner and 2013 will see more modest growth of 2.2 per cent.
"Overall, economic momentum in Canada is slightly firmer than the bank had expected in January," the bank said.
"The external headwinds facing Canada have abated somewhat, with the U.S. recovery more resilient and financial conditions more supportive than previously anticipated."
The global economy has also improved, the bank adds, with Europe now expected to emerge from the recession in the second half of this year, U.S. growth profile slightly stronger and economic activity in the emerging world moderating but to a "still robust pace."
Yet, Carney warned that the world is not yet out of the woods. While risks have abated, the global economy is still underperforming and besides the usual suspects in debt-strapped Europe, he cited the high price of oil, caused by political turmoil in the Middle East, as a new risk factor confronting future growth.
"In particular, the international price of oil has risen further and is now considerably higher than that received by Canadian producers. If sustained, these oil price developments could dampen the improvement in economic momentum," the bank cautioned.
For Canada, the bank said most of the future growth will come from domestic factors, with strong investments from businesses and robust household spending due to higher confidence and low interest rates.
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