Summary of announcement

The Bank of Canada has decided to leave its target for the overnight lending rate at 0.25 per cent, and further reiterated its “conditional” commitment to keep the rate at this level until the end of the second quarter of this year.

The overnight lending rate is the rate at which major participants in the money market borrow and lend funds to each other for one day. Other benchmark rates like the prime rate generally track the up and down movements of the overnight rate.

Analysis of announcement

The Bank of Canada acknowledged that economic activity in Canada has been slightly stronger than forecast in its January Monetary Policy Report (MPR), with the core inflation rate higher as well. In past releases, the Bank suggested that the risks to its outlook for consumer price inflation were weighted to the downside because it was felt that the high value of the Canadian dollar vis-à-vis the US could hamper the recovery in exports south of the border and thus broader economic recovery in Canada.

In the latest statement, there was no mention of a weighting toward downside risks. This adds even more credence to the view that interest rates will be trending upward in the second half of 2010 as the Bank takes action to ensure that consumer price inflation remains near its two per cent target as economic recovery takes hold. The argument is that if interest rates remained at current levels for too long the level of consumer spending would push price growth (inflation) beyond the Bank’s target.

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Jason Mercer – TREB Senior Manager of Market Analysis

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Filed under: Real Estate News

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