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Bank of Canada keeps interest rates steady

Canada’s economic fate could rest strongly on our neighbours to the south, just as long as the crisis in Europe remains contained.

The Bank of Canada is putting stock in a modest recovery in the United States to lift exports and investment in this country, which itself will see slower growth than previously thought.

In its quarterly Monetary Policy Report, released today, the bank said it now anticipates growth of 1.5% this year, down from 2% projected in the January MPR. In 2014, the economy is pegged to expand by 2.8%, compared with the previous estimate of 2.7%.

Overall, global growth is set at 3% this year, up from the earlier forecast of 2.9%, and 3.6% in 2014, also up slightly from the January estimate of 3.5%.

Tuesday’s outlook from the International Monetary Fund mirrored the bank’s prediction of 1.5% this year, while its estimate for 2014 came in at a slightly lower 2.4%. Globally, the IMF said output would reach 3.3 % in 2013 and 4% next year.

Elsewhere, the bank said the U.S. economy is continuing to expand “at a modest pace,” with the gradually strengthening private demand partly offset by accelerating fiscal conditions.” Policy-makers expect U.S. growth of 2% in 2013 and 3.1% next year.

Never in doubt was the decision by policy-makers to keep its trendsetting interest rate at its near-historic low of 1%, where it has stood since September 2010 as the bank encouraged spending to drive recovery from the 2008-09 recession.

At the same time, the bank is doggedly sticking to its theme that interest rates will eventually be going up, not down.

Significantly, there was no change Wednesday in the bank’s guidance on rates. Some economists had been looking for policy-makers to weaken their slant toward raising borrowing costs.

Instead, the bank’s statement reiterated that the current key rate “will likely remain appropriate for a period of time,” and again citing “continued slack in the Canadian economy, the muted outlook for inflation, and the constructive evolution of imbalances in the household sector.”

Growth in consumer spending, which has pushed household debt-to-income ratios to record highs, is likely to continue a recent slowing trend, the bank said, reflecting “moderate increases in consumption and further declines in residential investment.”

Still, the bank remains cautious about the residential housing market overall. “Despite the recent moderation in the rate of new housing construction, there are still signs of overbuilding, particularly of multi-unit dwellings in some urban areas.”

The Toronto and Vancouver condo markets have attracted the most attention from the policy-makers at the central bank, as well as Finance Minister Jim Flaherty — who in July tightened lending rules on government-insurance mortgages and, more recently, warned financial institution against encouraging consumers to plow into the housing market by offering record-low five-year fixed lending rates.

Source: Gordon Isfeld, Financial Post