Bank of Canada holding Prime Lending Rate until September

General Denise Dunkley 25 May

Eric Lam Financial Post May 24, 2011

The Bank of Canada’s plan to raise interest rates and exit its stimulus program has been delayed to September due to renewed uncertainty about the fiscal crunch in Europe and its potential spillover effects into Canada, the team Economics said Tuesday.

Dawn Desjardins, assistant chief economist, expects the BoC to maintain its 1.00% rate until September, and has cut the forecast rate to 1.75% by the end of 2011 from 2.00%. Banks maintains expectations for the overnight rate to hit 2.5% in mid-2012, and forecast GDP growth of 3.2% in 2011 and 3.1% in 2012.

Original forecasted rate hikes in July, September, October and December this year. The bank now only expects hikes in September, October and December.

“Combined with already-present downside risks to domestic growth in the second quarter, the Bank of Canada is likely to remain on the sidelines longer than we previously thought,” reported in a note to clients. “Complicating the outlook are global developments with the European sovereign debt crisis bringing fiscal and debt rating concerns to the forefront for investors. In the United States, economic surprises have been to the downside.”

So far, the Canadian economy looks to be holding steady with data suggesting 0.3% growth in March after a dip in February. Monthly growth figures put the economy on pace for 3.7% growth with risks on the upside.

Persistent strength in housing and growth in household credit, however, means the BoC cannot wait too long before taking action to avoid inflationary pressure.