Rate kept at 0.5%

The Bank of Canada on Wednesday kept its trendsetting interest rate on hold, acknowledging the economy is still facing a “complex and lengthy adjustment”.

The Bank said because Canada’s resource sector is still struggling with low commodity prices, overall business investment has suffered.

For the fourth quarter, the BoC had been calling for GDP growth of 2.5 per cent in the third quarter of this year and 1.5 per cent in the final three-month period.

“The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1/2 per cent. The Bank Rate is correspondingly 3/4 per cent and the deposit rate is 1/4 per cent”.

TD economist Leslie Preston said Canada has been much more severely affected by the collapse in oil prices than the US because crude is a much bigger part of the Canadian economy.

The cheaper dollar, interest rate relief and the stronger USA economy are all helping the Canadian economy. “Policy divergence is expected to remain a prominent theme”, the Bank of Canada noted.

The United States, it said, continues to grow at a “solid pace”, even though private domestic demand remains weaker than expected. The resource sector is still contending with lower prices for commodities. The labour market has been resilient at the national level, although with significant job losses in resource-producing regions.

David Dodge, who headed the Canadian central bank from 2001 to 2008, said he expects the Bank of Canada to be hesitant to tighten until the Fed’s benchmark rate – which has been in a 0 to 0.25 percent range since 2008 – “moves at least half a point above the policy rate here in Canada”.

The U.S. Federal Reserve has signaled it could raise interest rates as early as this month. “The ongoing terms-of-trade adjustments and shifting growth prospects across different regions are contributing to exchange-rate movements”. The price of oil (West Texas Intermediate) prices has mostly been below the bank’s October monetary policy report (MPR) assumption of US$45 a barrel.

Inflation risks “remain roughly balanced”, the central bank said Wednesday, reiterating previous statements. “Core inflation is close to 2% as the effects of the lower dollar and the output gap continue to offset each other”. The overheating in Vancouver and Toronto goes on, as does cooling in Alberta and Saskatchewan resulting in greater financial stability risks.