The Bank of Canada on Wednesday decided to hold its benchmark interest rate at current levels of 0. 5 percent, ruling that the risks to the profile for inflation are roughly balanced and the current stance of monetary policy is appropriate.
The central bank cut its rate twice last year in an attempt to stimulate the economy, and economists were evenly split as to whether the bank would cut again or stand pat in the latest decision.
The bank said inflation in Canada is evolving broadly as expected and the dynamics of the global economy are broadly as anticipated in the previous monetary policy report. "China continues its transition to a more sustainable growth path and the expansion in the United States is on track, despite temporary weakness in the fourth quarter of 2015," Bank of Canada Governor Stephen Poloz said in Ottawa.
The central bank acknowledged the slide in the price of oil and other commodities represented a setback and it estimated that fourth-quarter growth had stalled, with excess capacity not seen starting to be absorbed until the second quarter of 2016.
"The protracted process of reorientation towards non-resource activity is underway, helped by stronger U.S. demand, the lower Canadian dollar, and accommodative monetary and financial conditions," it said.
Fan Yang, fellowship of Canadian Securities Institute (FCSI), was among those who was expecting a rate cut, and said Wednesday he still thinks there would be one sooner rather than later. "A cut would expedite the depreciation of Canadian dollar, but we wouldn't rule out another rate cut in March or April at the latest," Yang told Xinhua.
The Canadian dollar jumped about half a cent on the rate news, a sign that investors were worried about a rate cut, and priced it into the value of the currency. When the central bank didn't cut the key lending rate, it marked a vote of confidence in the loonie, which rose to 0.6889 U. S. dollar before retreating again. But within an hour of the rate announcement, the loonie was back in the red at 0.6863 U.S. dollar.
The bank may be reluctant to give any more stimulus until the federal budget comes out, since Ottawa is widely expected to flood the economy with infrastructure spending, according to Mike Xie, managing director of Vancouver-based Doubleocean Financial Group.
The central bank projects Canada's economy would grow by about 1.5 percent in 2016 and 2.5 percent in 2017. The next scheduled date for Bank of Canada to announce the overnight rate target is Mar. 9.
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