Bank Of Canada Leaves Lending Rate At 1%, Maintains Historically Low Borrowing Costs

OTTAWA — The Bank of Canada is keeping short-term interest rates unchanged, signalling to markets it will maintain borrowing costs at historic low levels for the near future in light of the worsening global and domestic economies.

As expected, the central bank kept its benchmark overnight rate at one per cent on Wednesday -- where it's been for a year -- for yet another policy-setting date.

Nor was there a hint in the accompanying statement that the bank may be thinking of cutting interest rates further, as suggested by some economists.

A key focus in the announcement is on how much more darkly the bank's governing council sees the gathering economic and financial storm confronting the world.

The global outlook has "deteriorated in recent weeks," it says. The European sovereign debt crisis has intensified, global growth has slowed and financial market volatility has risen "sharply." New data also shows the U.S. recession was deeper than previously thought and the recovery is shallower, and will be impeded further as Washington starts withdrawing stimulus.

The bank warns the European crisis has already driven financial markets from risk-taking and "could prompt more severe dislocations."

Canada is not altogether sheltered from the storm. Already exports have collapsed and financial conditions have tightened, while growth stalled in the second quarter and will be slower going forward.

Canadians can expect lower incomes and wealth, the bank said.

Under these new diminished expectations and rising risks, the bank said the economy cannot afford the further drag of higher borrowing costs.

As a result, the bank has dropped its caution that the current "considerable monetary policy stimulus" will have to be withdrawn.

Now it says there is no need to raise interest rates because the economy is so weak, inflation is no longer a concern.

"In light of slowing global momentum and heightened financial uncertainty, the need to withdraw monetary policy stimulus has diminished," the bank said.

Economists had expected some revision of the bank's year-long view that higher interest rates were just around the corner, especially given the global turmoil and the big miss by the economy in the second quarter. It contracted by 0.4 per cent -- instead of growing by 1.5 per cent as expected -- amid collapsing demand for Canadian exports.

But the bank's language Wednesday was somewhat more straight-forward and non-nuanced than some had anticipated.

All that is missing from the bank's statement is a new and lower forecast for the economy. A new forecast will be issued at its next scheduled policy date on Oct. 25, it says.

The good news in the stark statement is that the bank's governors do not believe a second recession is in the offing, at least in Canada. It says the second quarter stall was due mainly to temporary factors.

"The bank continues to expect that growth will resume in the second half of this year," it says, "led by business investment and household expenditures, although lower wealth and incomes will likely moderate the pace of investment and consumption growth."

As well, "net exports are now expected to remain a major source of weakness, reflecting more modest global demand and ongoing competitiveness challenges, in particular the persistent strength of the Canadian dollar."

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