Bank of Canada raises key rate as growth takes off

June 01, 2010

Les Whittington

Ottawa Bureau–bank-of-canada-raises-key-rate-as-growth-takes-off

OTTAWA—The era of rock-bottom borrowing costs came to an end Tuesday as the Bank of Canada raised its influential overnight interest rate to 0.5 per cent, up from 0.25 per cent.

Economic activity “in Canada is unfolding largely as expected,” bank governor Mark Carney said in a brief announcement.

“The economy grew by a robust 6.1 per cent in the first quarter, led by housing and consumer spending. Employment growth has resumed,” the bank said. Carney said the bank also anticipates an increase in business investment, which will be “important” for a continued recovery.

The central bank has kept interest rates at an historic low to help fight the recession, but Carney now is balancing the need to spur growth with the need to keep a lid on inflation.

Canada is the first of the G7 leading industrial nations to raise its key rate.

“The outlook for inflation reflects the combined influences of strong domestic demand, slowing wage growth, and overall excess supply,” Carney wrote.

“In this context, the Bank has decided to raise the target for the overnight rate to 1/2 a per cent.”

But Carney warned that the outlook for international business conditions has been clouded by a mixed growth picture and the debt crisis in Europe.

“The global economic recovery is proceeding but is increasingly uneven across countries, with strong momentum in emerging market economies, some consolidation of the recovery in the United States, Japan and other industrialized economies, and the possibility of renewed weakness in Europe,” the bank stated.

Carney warned that the business-driven growth needed to replace government stimulus packages has been slow to emerge globally.

“In most advanced economies, the recovery remains heavily dependent on monetary and fiscal stimulus.”

“Recent tensions in Europe are likely to result in higher borrowing costs and more rapid tightening of fiscal policy in some countries – an important downside risk,” the bank said.

But so far, “the spillover into Canada from events in Europe has been limited to a modest fall in commodity prices and some tightening of financial conditions,” the bank said.

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