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Bank of Canada maintains interest rates

Signals rate hike in June As was widely expected, the Bank of Canada held its benchmark overnight lending rate steady at 0.25 per cent at its setting on April 20, 2010. The trend-setting Bank rate, which is set 0.25 percentage points above the overnight lending rate, remains at 0.5 per cent. With the Bank having dropped its commitment to stay on hold until at least the second half of the year conditional on the outlook for inflation, financial markets now expect the Bank to raise rates at its next at its next fixed announcement date on June 1st. The Bank raised its forecast for economic growth this year from 2.9 per cent in the January Monetary Policy Report to 3.7 per cent, attributing the more “front-loaded” profile for growth to “stronger near-term global growth” and “very strong housing activity”. The Bank noted that the economy still faces headwinds from the strength of the Canadian dollar, weak U.S. demand, and “Canada’s relatively poor relative productivity performance”. The mention of productivity could be a signal that the Bank plans to downgrade the potential growth rate of the economy in its new Monetary Policy Report, due out on Thursday, meaning the economy would return to potential faster than previously forecast. In fact, the Bank did move the goalposts forward as to when it expects the economy to return to full potential, now forecasting the second quarter of 2011. The Bank had previously forecast a return to potential by the third quarter of 2011. This is another signal that rates will have climb sooner in order to fight inflation. The Bank said core inflation had been somewhat firmer than projected in January, but noted that this was due to temporary factors. The core rate is expected to ease slightly in the second quarter of 2010 and to remain near 2 per cent throughout the rest of the projection period. Total CPI inflation is expected to be slightly higher than 2 per cent over the coming year, before returning to the target in the second half of 2011. In previous announcements, the Bank had noted that it believed the balance of risks to the outlook to be tilted to the downside. At its last announcement, the Bank judged those risks to be balanced. This announcement removed any mention of the balance of risks, leaving financial markets to draw their own conclusions. “The April interest rate announcement all but guarantees the Bank will raise rates in June,” said CREA’s Chief Economist Gregory Klump. As of April 19th, the advertised five-year conventional mortgage rate stood at 5.85 per cent. This is up 0.4 per cent from one year earlier, and stands 0.46 per cent above where it stood when the Bank made its previous interest rate announcement on March 2, 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. (CREA 03/02/2010)

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