Bank of Canada holds rate

The Bank of Canada on Tuesday held the overnight rate at 0.25% following its commitment to keep rates down through the end of June 2010. The Bank of Canada remained optimistic for the performance of the economy in the second half of 2009, it seemed to be pessimistic on the medium term outlook for the Canadian economy. The bank stated the stronger performance in the second half of 2009 will be driven by "monetary and fiscal stimulus, increased household wealth, improving financial conditions, higher commodity prices, and stronger business and consumer confidence". However, the negative impact from the strength of the Loonie on the export market will more than offset these improvements and therefore the Bank has lowered its growth projection for 2011 to 3.3% down from 3.5%. The Bank now anticipates the economy will reach full capacity and inflation will reach the Bank's target by the end of June 2011, one quarter later than in the July MPR. The Bank of Canada feels the risks to the "inflation projection are tilted to the downside."

This announcement laid to rest some speculation that the bank would follow Australia' lead and hike rates sooner than expected. Canada like Australia's economic growth is being helped by commodity markets but unlike Australia, Canada suffered a deep, short recession led by the US. The Bank of Canada wants to ensure that Canada is in a recovery before hiking rates too soon. The outlook for the Canada's economy has improved significantly since the last rate announcement date but the soft domestic demand has kept inflation well under the 2% target.

Some economists believe the Bank of Canada will keep rates steady to the fourth quarter of next year but this only a prediction. Variable rate mortgages will be the best option for clients, at least for the next year or more.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.