Bank of Canada holds interest rates steady

The Bank of Canada held its benchmark overnight lending rate steady at 0.25 per cent at its setting on June 4^th, 2009. The trend-setting Bank rate, which is set 0.25 percentage points above the overnight lending rate, remains at 0.5 per cent.

The Bank indicated that economic and inflation outlooks are unfolding largely as it expected when it last cut its benchmark interest rate on April 21^st, 2009. At that time, it forecast the Canadian economy would continue contracting until the fourth quarter of 2009. It also forecast that inflation would to climb back to the two per cent midpoint of its target range between one and three per cent in the third quarter of 2011.

The Bank also reiterated its pledge to hold interest rates at current levels until the end of the second quarter of 2010, conditional on its inflation outlook.

In April, the Bank assessed the overall risks to its inflation projection as tilted slightly to the downside. It reiterated this assessment in its interest rate announcement on June 4^th.

The Bank acknowledged significant improvements in financial conditions and commodity prices, and modest recoveries for consumer and business. However, it expressed concern that these positive economic factors could be fully offset if “unprecedentedly rapid rise in the Canadian dollar proves persistent.”

The Bank’s benchmark overnight lending rate was dropped in April to what it described as “the effective lower bound for that rate.” If it needs to boost economic growth now that interest rates are as low as they can go, the Bank reiterated that it may resort to unconventional means of loosening monetary policy conditions.

The Bank’s Monetary Policy Report published on April 23^rd included information about additional monetary policy tools it may use to further inject liquidity into the financial system in its ongoing attack against the continuing credit crunch.

When the Bank cut interest rates on June 4^th, the advertised five-year conventional mortgage rate stood at 5.45 per cent. This is down 1.2 per cent from one year earlier, and unchanged from where it stood when the Bank made its previous interest rate announcement on April 21^st.

The ongoing credit crunch has led mortgage lenders to reduce discounts on advertised mortgage interest rates, and in some cases these have been completely eliminated.

“The Bank has signaled it is prepared to use unconventional tools at its disposal to nurture budding green shoots of economic improvement in Canada,” said CREA Chief Economist Gregory Klump. “Among these green shoots is the rebound in recent months of national resale housing activity and average prices.”

(CREA 04/06/2009)