Topic: Central bank holds interest rate, warns of risks ahead

[Kris]

Code: [Select]

http://www.ctv.ca/CTVNews/TopStories/20111025/mark-carney-bank-of-canada-interest-rate-111025/
CTVNews.ca Staff

Date: Tue. Oct. 25 2011 2:45 PM ET

The Bank of Canada kept its key lending rate at 1 per cent on Tuesday, suggesting it believes the economy is still fragile and isn't ready for a bump in interest rates.

The decision marks the ninth consecutive time the central bank has kept the rate at just 1 per cent.

The statement that accompanied the interest rate announcement warned of gloomy days ahead and said Europe will most likely enter a brief recession.

"The global economy has slowed markedly as several downside risks... have been realized," the statement said.

"The combination of ongoing deleveraging by banks and households, increased fiscal austerity and declining business and consumer confidence is expected to restrain growth across the advanced economies. The bank now expects the euro area... will experience a brief recession."

While the bank said it expects a European recession to be brief, it said even that prognosis wasn't certain.

Finance Minister Jim Flaherty, reacting to the Bank of Canada statement, acknowledged that times are tough and while Canada is not directly in the line of fire, it faces considerable risk due to outside factors.

"The September survey of private sector economies underlines the turbulence and weakness we have seen in the global economy since the summer, especially in Europe and in the United States," Flaherty said.

"Canada is not immune to those recent global pressures and they will continue to limit growth in Canada for the remainder of this year and 2012."

Flaherty's comments came on the same day news emerged that Europe's long-awaited bank bailout was far from settled and that the government of Italian Prime Minister Silvio Berlusconi was closer than ever to collapse.

Flaherty repeated his mantra that the European Union must take decisive action.

"We've been making it clear, sometimes being irksome I know to my European colleagues, that it is essential they not only come up with a plan but an effective plan that will result in overwhelming market confidence," Flaherty said.

In his summer forecast, Bank of Canada Governor Mark Carney had painted a surprisingly rosy economic outlook. Some analysts had called on Carney to curtail his expectations this time around.

He did just that. The forecast outlined the view that growth in the industrialized world is on the decline, even in powerhouse developing economies such as China.

However, there was one bright patch in the otherwise gloomy sky forecast. The bank said it "assumed the euro-area crisis will be contained."

Canada's economy is currently feeling the effects of the struggling global economy, and will continue to, the report said, despite the fact growth rebounded here in the third quarter.

The outlook said Canada's "underlying economic momentum has slowed and is expected to remain modest through the middle of next year."

The statement estimated Canada's economy grew 2.1 per cent in 2011 and will increase by just 1.9 per cent in 2012.

Both numbers were down 0.7 per cent from the bank's projection in July.

The bank predicted that Canada's economy will not return to a normal growth rate of around 2.9 per cent until the end of 2013.

The central bank suggested it won't raise or lower the 1 per cent overnight lending rate any time soon.

"With the target rate near historic lows and the financial system functioning well, there is considerable monetary policy stimulus in Canada," the statement said.