Vancouver Condo Real Estate Blog

OTTAWA – The Bank of Canada today announced that it is maintaining its target for the
overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate
is 3/4 per cent.
As anticipated in the January Monetary Policy Report (MPR), the global economic recovery is
becoming more firmly entrenched and is expected to continue at a steady pace. In the United
States, growth is solidifying, although consolidation of household and ultimately government
balance sheets will limit the pace of the expansion. European growth has strengthened, despite
ongoing sovereign debt and banking challenges in the periphery. The disasters that struck Japan
in March will severely affect its economic activity in the first half of this year and create short-term
disruptions to supply chains in advanced economies. Robust demand from emerging-market
economies is driving the underlying strength in commodity prices, which is being further
reinforced by supply shocks arising from recent geopolitical events. These price increases,
combined with persistent excess demand conditions in major emerging-market economies, are
contributing to the emergence of broader global inflationary pressures. Despite the significant
challenges that weigh on the global outlook, global financial conditions remain very stimulative
and investors have become noticeably less risk averse.
Although recent economic activity in Canada has been stronger than the Bank had anticipated,
the profile is largely consistent with the underlying dynamics outlined in the January MPR.
Aggregate demand is rebalancing toward business investment and net exports, and away from
government and household expenditures. As in January, the Bank expects business investment to
continue to rise rapidly and the growth of consumer spending to evolve broadly in line with that
of personal disposable income, although higher terms of trade and wealth are likely to support a
slightly stronger profile for household expenditures than previously projected. In contrast, the
improvement in net exports is expected to be further restrained by ongoing competitiveness
challenges, which have been reinforced by the recent strength of the Canadian dollar.
Overall, the Bank projects that the economy will expand by 2.9 per cent in 2011 and 2.6 per cent
in 2012. Growth in 2013 is expected to equal that of potential output, at 2.1 per cent. The Bank
expects that the economy will return to capacity in the middle of 2012, two quarters earlier than
had been projected in the January MPR.
While underlying inflation is subdued, a number of temporary factors will boost total CPI
inflation to around 3 per cent in the second quarter of 2011 before total CPI inflation converges
to the 2 per cent target by the middle of 2012. This short-term volatility reflects the impact of
recent sharp increases in energy prices and the ongoing boost from changes in provincial indirect
taxes. Core inflation has fallen further in recent months, in part due to temporary factors.
It is expected to rise gradually to 2 per cent by the middle of 2012 as excess supply in the
economy is slowly absorbed, labour compensation growth stays modest, productivity recovers
and inflation expectations remain well-anchored.
The persistent strength of the Canadian dollar could create even greater headwinds for the
Canadian economy, putting additional downward pressure on inflation through weaker-than-expected
net exports and larger declines in import prices.
Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate
at 1 per cent. This leaves considerable monetary stimulus in place, consistent with achieving the
2 per cent inflation target in an environment of material excess supply in Canada. Any further
reduction in monetary policy stimulus would need to be carefully considered.
Information note:
A full update of the Bank’s outlook for the economy and inflation, including risks to the
projection, will be published in the MPR on 13 April 2011. The next scheduled date for
announcing the overnight rate target is 31 May 2011.