Bank of Canada holds rates, warns on global outlook

The Bank of Canada acknowledged Tuesday the European debt crisis has caused “a sharp deterioration” in the global financial sector, but indicated it’s keeping interest-rate options open, at least for now.
The central bank left its lending rate at a near-historic low of 1% — where it has sat since September 2010 — and pointed to weaker expectations for global economic growth.
“Some of the risks around the European crisis are materializing and risks remain skewed to the downside. This is leading to a sharp deterioration in global financial conditions,” the bank said in its statement accompanying the rate decision.
“The outlook for global economic growth has weakened in recent weeks.”
Douglas Porter, deputy chief economist at BMO Capital Markets, said the bank “is in a holding pattern.”
“Given the sudden re-accumulation of heavy European clouds, we suspect it could be a long wait.”
Many economists have pulled back on their forecasts for a rate increase before the end of the year, while others have been speculating that rate could actually start coming down if global uncertainty continues.
Leslie Preston, at TD Economics, said Tuesday’s statement “struck a very prudent balance, acknowledging the weaker global economic outlook, but also reminding markets . . . that barring a global catastrophe, the next interest rate move will be up, not down.”
Tuesday’s rate decision came as Finance Minister Jim Flaherty joined his Group of Seven counterparts on a conference call to discuss Europe’s debt crisis and the fallout within the region’s banking sector. Bank of Canada governor Mark Carney also took part in the talks, along with other G7 central bankers.
Both the economies of Canada and the U.S. have slowed along with other countries in recent months as the crisis in Europe intensified.
Domestic growth in the first quarter of this year was just 1.9%, on an annualized basis, according to Statistics Canada. The Bank of Canada had forecast 2.5% growth in the first three months.
“While the U.S. economy continues to expand at a modest pace, economic activity in emerging-market economies is slowing a bit faster and a bit more broadly than had been expected,” the bank said Tuesday.
“More modest global momentum and heightened financial risk aversion have reduced commodity prices.”
The central bank said growth was “slightly slower than expected” in the first quarter, “underlying economic momentum appears largely consistent with expectations.”

“In particular, housing activity has been stronger than expected, and households continue to add to their debt burden in an environment of modest income growth,” it said.
“To the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed, some modest withdrawal of the present considerable monetary stimulus may become appropriate.”
BMO’s Mr. Porter said the “to the extent” phrase is an addition to the bank’s April rate statement, giving it “a ready escape hatch if global growth weakens significantly