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Bank of Canada maintains interest rates

As was widely expected, the Bank of Canada held its benchmark overnight lending rate steady at 0.25 per cent at its setting on March 2, 2010. The trend-setting Bank rate, which is set 0.25 percentage points above the overnight lending rate, remains at 0.5 per cent. The Bank acknowledged that economic growth and inflation have recently picked up by more than it previously expected. In its most recent Monetary Policy Report published in January 2010, the Bank predicted that the Canadian economy would grow by 3.3 per cent and that core inflation would be running at 1.6 per cent in the fourth quarter of 2009. In actuality, the Canadian economy expanded by five per cent on an annualized basis, and the core rate of inflation hit two per cent year-over-year in December 2009. The Bank recognized that the “ongoing global economic recovery is being driven largely by strong domestic demand growth in many emerging-market economies and supported in advanced economies by exceptional monetary and fiscal stimulus, as well as extraordinary measures taken to support financial systems.” However, financial markets will focus attention on the change in language compared to the Bank’s recession-era announcements. In its March 2nd announcement, the Bank indicated that “the main macroeconomic risks to the inflation projection are roughly balanced.” This marks the first time in over a year in which it judges that the risks to inflation were tilted to the downside. The Bank also restated its commitment to keep its trend-setting overnight lending rate on hold until the second half of 2010, conditional on the outlook for inflation. “Financial markets, however, will look past the Bank’s conditional commitment and increase bets that the Bank will move to raise rates before then,” said CREA’s Chief Economist Gregory Klump. “This will result in upward pressure on the Canada-U.S. currency exchange rate, thereby making the Bank’s assertion ‘that the persistent strength of the Canadian dollar and the low absolute level of U.S. demand [will] continue to act as significant drags on economic activity in Canada’ something of a self-fulfilling prophecy.” "Interest rates will rise, but increases will be small and spread out over time. The Bank expects economic growth to rely on domestic demand once temporary government stimulus spending measures expire. Raising interest rates too soon and by too much runs the risk of choking economic growth," added Mr. Klump. As of March 2nd, the advertised five-year conventional mortgage rate stood at 5.39 per cent. This is down 0.4 per cent from one year earlier, and stands 0.1 per cent below where it stood when the Bank made its previous interest rate announcement on January 19, 2010. Improving credit market conditions have enabled lenders to reintroduce discounts off posted mortgage interest rates. Discounts of about one percentage point can be negotiated, depending on lender-client relationship.

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