Canada keeps policy rate at 1% on delayed export recovery

Bank of Canada Governor Stephen Poloz kept his main interest rate unchanged and reiterated that current monetary policy remains appropriate as an expected rotation of demand to exports and investment is being delayed.

Policy makers kept the benchmark rate on overnight loans between commercial banks at 1% for the 24th consecutive meeting and said slack in the economy will start to disappear in 2014. The decision from Ottawa was forecast by all 22 economists in a Bloomberg News survey.

“A gradual normalization of policy interest rates” can be expected as inflation returns to target and excess capacity in the economy is used up, policy makers led Poloz, 57, said in a statement from Ottawa today, echoing the last decision.

Business spending and exports have slowed the expansion of the world’s 11th largest economy this year even with recent signs of stronger growth in the U.S. and Europe. Consumer spending has continued to lead growth after warnings from Poloz and Finance Minister Jim Flaherty about record debts taken on at low interest rates.

“The bank is becoming more entrenched on the sidelines even though they haven’t changed forward guidance,” David Watt, chief economist at the Canadian unit of HSBC Holdings Plc, said by telephone from Toronto.

The Canadian dollar rose 0.4% to C$1.0495 per U.S. dollar at 10:23 a.m. in Toronto. Earlier it gained 0.5% to C$1.0479 per U.S. dollar, the biggest intraday move since Aug. 8 and the highest level in a week. One dollar buys 95.28 U.S. cents.

Delayed Demand

“Uncertain global economic conditions appear to be delaying the anticipated rotation of demand in Canada towards exports and investment,” the bank said.

The central bank’s last quarterly business survey showed 35% of executives planned more spending on machinery and equipment while 26% were cutting back. It was the third lowest balance of opinion since the country exited recession in 2009.

Teck Resources Ltd., Canada’s second-largest mining company, said in July it would delay a copper project in Chile and the start of production at a coal mine in British Columbia after a decline in commodity prices.

The bank also said that “significant slack” remains in the economy, inflation “remains subdued” and a “constructive evolution of household imbalances” is continuing, citing slower growth of household debt and higher mortgage rates.

Slower Growth

Consumer prices advanced 1.3% in July, the 15th straight month the rate was slower than the bank’s 2% target. Output growth slowed to a 1.7% annualized pace in the second quarter, including a monthly decline of 0.5% in June that was the biggest since the 2009 recession.

The bank said today that the level of output in Canada’s economy is about what policy makers had forecast in July. The global economy is also progressing about as expected, the bank said, adding that “its dynamic has moderated.”

The U.S. economy has “slightly less momentum overall than anticipated,” the bank said, while the prospect of recoveries in Europe and Japan “remains promising.” In some emerging markets, “financial volatility has increased, adding uncertainty to growth prospects.”

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