Canada keeps key lending rate 1% amid reduced economy slack

March 8 (Bloomberg) -- The Bank of Canada kept its main interest rate at 1 percent, extending the longest pause since the 1950s, and said there is less slack in the economy amid easing global tensions and faster domestic spending.

The central bank said inflation will be higher than it forecast in January because of “reduced economic slack and higher oil prices” and that growth will be faster than projected in the January-March period because of temporary factors that it didn’t specify. The decision to leave rates unchanged was forecast by all 28 economists surveyed by Bloomberg News.

“Recent developments suggest that the outlook for the Canadian economy is marginally improved” since the decision in January, policy makers led by Governor Mark Carney, 46, said in a statement from Ottawa today. The one-page document also reiterated that there is “considerable monetary policy stimulus” in the economy.

The Canadian dollar rose after the announcement, which came on the same day the European Central Bank also signaled higher inflation even as growth in the region stalls. Canada’s economy, the world’s 10th largest, has been supported by global demand for commodities such as crude oil and low interest rates that have fed consumer spending, while manufacturing stumbled.

“Nothing in here signaling a rate hike coming soon, but markets will pick up on the slightly improved change in tone on the economy, and might move forward the implied date for the first rate hike” said Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce in Toronto.

Currency Rises

The currency rose 0.4 percent to 99.30 cents per U.S. dollar at 9:21 a.m. in Toronto. One Canadian dollar purchases $1.0071.

In January, the bank said inflation would reach the 2 percent inflation target and the economy would reach full output in the third quarter of next year. Today’s announcement didn’t specify a time for the economy returning to capacity.

“After moderating in the second quarter, total inflation is expected, along with core inflation, to be around 2 percent over the forecast horizon, reflecting the combination of modest growth of labor compensation, an economy operating around its potential over time, and well-anchored inflation expectations,” the bank said in its statement.

Decreased Uncertainty

“The heightened uncertainty around the global economic outlook has decreased,” the bank said today. “The global economy is still expected to grow below its trend rate as the deleveraging process in advanced economies proceeds.”

The rise in oil prices could also “dampen the improvement in global economic momentum” if it persists, the bank said.

Canada relies on exports for a third of its output and higher interest rates could boost a currency that has traded around parity with the U.S. dollar, harming the country’s competitiveness. The bank reiterated today that the “persistent strength” of the currency is a drag on the recovery.

Cardboard box and tissue-maker Cascades Inc. said Feb. 22 it will close a Toronto plant with 36 employees, citing a “significant reduction in business volume.” The next day the company said “the strength of the Canadian dollar had a significant impact on our profit margins.”

The country’s job market has softened, with unemployment reaching a nine-month high of 7.6 percent in January.

Growth Slows

Canada’s economic expansion slowed to a 1.8 percent annualized pace in the fourth quarter, according to a March 2 Statistics Canada report, even while U.S. growth accelerated to 3 percent. In January, the Bank of Canada forecast growth averaging 1.8 percent in the first half of this year.

Consumers will account for more than half of Canada’s 2 percent economic growth this year, according to the central bank’s January forecast document. “Private demand is now expected to be slightly stronger than projected, owing to improved sentiment and highly-supportive financial conditions,” the bank said today. “Canadian household spending is expected to remain high relative to gross domestic as households add to their debt burden, which remains the biggest domestic risk.”

Consumer spending expanded at a 2.9 percent annualized pace in the fourth quarter, up from 1.8 percent in the third quarter, Statistics Canada said, while business investment rose 6.3 percent, the eighth consecutive increase.

Telus Corp., Canada’s third-largest wireless carrier, said last week it will spend C$3 billion on new buildings and equipment and hire 1,300 people over the next three years in British Columbia where it’s headquartered.

Bloomberg News

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