Bank of Canada Maintains Rate Target at 1%

The Bank of Canada this week announced that it is maintaining its target for the overnight rate at 1%. The bank prime lending rate remains at 3%.

The U.S. economy has grown at a slower pace than expected and continues to be restrained by the consolidation of household spending and a slow growth in employment. While growth in Europe has been stronger than expected, fiscal cuts in many countries reflect a weaker growth than originally anticipated. Widespread concerns over sovereign debt have increased risk aversion and volatility in financial markets.

In Canada, the economic expansion is proceeding as projected, although the expected rotation of demand is somewhat slower than had been anticipated. Household spending remains solid and business investment vigorous. Net exports remain weak, due to modest U.S. demand and ongoing competitiveness challenges, particularly the persistent strength of the Canadian dollar. Despite increased global risk aversion, financial conditions in Canada remain very active and private credit growth is strong.

The bank expects growth in Canada to re-accelerate in the second half of 2011. Over the projection horizon, business investment is expected to remain strong, household spending to grow more in line with disposable income, and net exports to become more supportive of growth. Relative to the April projection, growth in household spending is now projected to be slightly firmer, reflecting higher household income, and net exports to be slightly weaker, reflecting more subdued U.S. activity. This was the 10th consecutive month that there was no change to prime rate. The Bank of Canada did hint that there may be rate increases on the horizon as the Canadian economy grows closer to full capacity.