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Interest rates to remain on hold for longer

The Bank of Canada kept its trend-setting Bank Rate at 1.25 per cent on October 25, 2011. This marks the ninth consecutive announcement in which interest rates have been held steady. The tone of the accompanying statement was very dovish, with the Bank noting that “the global economy has slowed markedly as several downside risks to the projection outlined in the Bank’s July Monetary Policy Report (MPR) have been realized.” Of particular note, the Bank said it now expects a “brief recession” in the Eurozone. The Bank remains of the opinion that the euro-area crisis will be contained, but flagged obvious downside risks to that assumption. As a result of this and other factors, the Bank has downgraded its forecast Canadian economic growth this year (2.1% compared to 2.8% in the July MPR) and for 2012 (1.9% compared to 2.6% in the July MPR). That said, the outlook for growth in 2013 was upgraded to 2.9% from 2.1%, indicating the Bank believes that anticipated stronger growth will eventually be achieved. Along with the return of more robust economic activity being pushed further out into the future, core inflation is now expected to remain below the Bank’s 2% target until the end of 2013. What it all means is that interest rates will likely be on hold even longer. Expectations as to how long it would be before the Bank hikes rates had previously centered around the fall of 2012, although it will now more likely be into 2013 before the Bank begins to tighten monetary policy from current levels. As of October 25, 2011, the advertised five-year lending rate stood at 5.29 per cent. This is down 0.1 percentage points from 5.39 per cent on September 7, when the Bank made its last policy interest rate announcement. The Bank will make its next scheduled rate announcement on December 6th, 2011. (CREA 10/25/2011)

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