Canada keeps rates steady, says weak inflation still a risk

Posted by Reuters Canada

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The Bank of Canada continued to express concerns about weak inflation on Wednesday – even after consumer prices picked up markedly in January – and repeated that its next move on interest rates could be either up or down.

The central bank left its benchmark interest rate unchanged at 1.0 percent, as expected, extending a freeze that has lasted more than three years. Analysts do not expect a move until the third quarter of next year.

Even though the January inflation reading of 1.5 percent was higher than expected the bank maintained its view, outlined in a January report, that overall and core inflation would remain well below 2 percent throughout 2014 and rise to 2 percent in about two years. The bank targets 2 percent inflation, the midpoint of a 1 to 3 percent range.

“With inflation expected to be well below target for some time, the downside risks to inflation remain important,” the bank said in a statement.

“The timing and direction of the next change to the policy rate will depend on how new information influences this balance of risks,” it said, using language identical to its last rate announcement on January 22.

The bank also still expects underlying Canadian growth of about 2.5 percent this year despite stronger-than-expected performance in 2013, saying the first quarter is “likely to be softer”.

The bank statement made no mention of the Canadian dollar, which has dipped in value against its U.S. counterpart in recent months.

In its Jan 22 rate statement, the bank said strong U.S. demand and the recent depreciation of the Canadian dollar should help to boost exports, business confidence and investment.

(Reporting by Louise Egan; Editing by David Ljunggren)