Bank of Canada holds key rate at 0.75% despite questions about U.S. weakness

By Andy Blatchford, The Canadian Press

The Bank of Canada is keeping its trendsetting interest rate locked at 0.75 per cent even as recent weakness in the United States raises questions about the economy here at home.

The central bank said Wednesday that it’s standing pat because inflation has been in line with projections and consumption has held up relatively well — even amid the net negative effects of lower oil prices.

However, the bank plans to keep an eye on the potential economic implications for Canada if the loonie stays higher than it has been in recent months — a result of lower U.S. dollar and slightly higher oil prices.

“If these developments are sustained, their net effect will need to be assessed as more data become available in the months ahead,” the bank said in delivering its latest rate announcement.

The central bank also said while risks to the country’s financial stability remain elevated, they seem to be unfolding as anticipated.

When it came to inflation, the bank’s outlook didn’t budge.

It said inflation, which had a reading of 0.8 per cent for April, remained at the lower end of the bank’s target range because of the temporary impact of lower energy prices.

The bank said temporary factors are also affecting core inflation, which excludes some volatile items such as gasoline. It said core inflation was higher than usual because of the effect of the past depreciation in the Canadian dollar.

“Although a number of complex adjustments are underway, the bank’s assessment of risks to the inflation profile has not materially changed,” the central bank said.

National Bank senior economist Krishen Rangasamy said the bank’s statement reiterates its optimism for the country’s economic recovery.

“The Bank of Canada is trying to send out a positive message,” he said.

It also seeks to reassure people that the bank will stay put on the rate for the a little while, said Rangasamy. He believes that should help build confidence with those who still believe the central bank could shake up markets again by suddenly moving the benchmark rate.

The Bank of Canada surprised markets in January by dropping the rate from a full percentage point as insurance against the “unambiguously negative” impact of sliding oil prices.

Last week, Bank of Canada governor Stephen Poloz called the weaker-than-expected U.S. economy “slightly puzzling,” but he expressed optimism it would start accelerating in the second half of 2015.

While Poloz has been counting on a strengthening American economy to provide a major boost for Canada — so far this year the U.S. has stopped short of expectations.

On Wednesday, the bank predicted a return to “solid growth” in the second quarter, even though Poloz has warned that data for the first three months of 2015 will look “atrocious” and he has projected zero growth for that period.

The bank’s next rate announcement is scheduled for July 15, when it will also release its quarterly monetary policy report.

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