Bank of Canada Interest Rate Announcement

May 31, 2011

As was widely anticipated, the Bank of Canada opted to hold the Bank's target rate at 1 per cent this morning . On inflation, the Bank noted that, "While underlying inflation is subdued, the Bank expects that high energy prices and changes in provincial indirect taxes will keep total CPI inflation above 3 per cent in the short term." However, the Bank expects total CPI inflation to return to 2 per cent by the middle of 2012 as excess capacity in the economy is absorbed.

The Bank further noted that any withdrawal of monetary stimulus would need to be "carefully considered". This is a nod to current uncertainly in the global economy, centered on re-emerging debt concerns in the Euro-zone as well as disappointing growth in the UnitedStates. This uncertainy seems likely to  push the Bank's next rate increase to September rather than July, though we would not completely close the door on a summer rate hike if core inflation starts to edge higher. We anticipate that once rate hikes resume, the Bank will raise its overnight rate to between 1.75 and 2 per cent by the end of 2011.