Bank of Canada maintains interest rate as low oil prices offset healing economy

Bank of Canada governor Stephen Poloz is keeping the trend-setting interest rate at one per cent, even as Canada's recent economic performance has the look of a “broadening recovery.”

OTTAWA — Bank of Canada governor Stephen Poloz is keeping the trend-setting interest rate at one per cent, even as Canada’s recent economic performance has the look of a “broadening recovery.”

In its interest-rate announcement Wednesday, the central bank cautioned that improvements to Canada’s economic health have been offset by risks such as sliding oil prices and high household debt.

The bank pointed to the balance of risks as the basis for its decision to maintain the rate, which hasn’t budged since September 2010 and has helped keep borrowing rates at historic lows.

Looking to the future, the Bank of Canada’s outlook appeared positive thanks to an improved U.S. economy and despite disappointing global growth.

“Canada’s economy is showing signs of a broadening recovery,” the bank said in its statement.

“Stronger exports are beginning to be reflected in increased business investment and employment.

“This suggests that the hoped-for sequence of rebuilding that will lead to balanced and self-sustaining growth may finally have begun.”

Due to the recent changes, the central bank also said the output gap appears to be smaller than it had predicted in its October monetary policy report. It noted, though, that there was still significant slack in the economy.

Signs of improvement have appeared in the data since the central bank’s last interest-rate announcement in October.

In that statement, the central bank called underlying inflationary pressures “muted” and said the inflation projection was “roughly balanced.”

Since then, the unemployment rate dipped to 6.5 per cent and the pace of GDP growth climbed to 2.8 per cent in the third quarter – half-a-percentage-point higher than the bank had expected.

Fresh figures have also pointed to a faster-than-anticipated growth for inflation.

The bank acknowledged Wednesday that inflation had climbed faster than expected, but it described the increase as “temporary effects” of a lower Canadian dollar and price jumps in certain consumer sectors, such as telecommunications and meat.

Meanwhile, it said weaker oil prices pose a downside risk to inflation and household imbalances present a risk to financial stability.

“Overall, the balance of risks remains within the zone for which the current stance of monetary policy is appropriate,” the Bank of Canada said.

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