The Bank of Canada held steady on interest rates Tuesday, keeping its key lending rate at 4.25 per cent, saying that a weaker U.S. economy and a stronger loonie will moderate domestic growth.
It was the first pause after seven consecutive quarter-point rate hikes that began last September.
"The current level of the target for the overnight rate is judged at this time to be consistent with achieving the inflation target over the medium term," the central bank said in a statement. "Risks to the projection remain roughly balanced, with a small tilt to the downside later in the projection period related to global imbalances."
Douglas Porter, deputy chief economist at BMO Nesbitt Burns, said the bank could not have been much clearer: "Effectively, they are suggesting that, as things stand, they are through tightening."
The Canadian dollar lost half a cent after the rate announcement, falling 0.53 of a cent (U.S.) to 88.35 cents - its lowest level in more than two months.
The Bank of Canada last raised its benchmark lending rate on May 24, and hinted that it would halt the upward movement of rates because inflation was under control. A year ago the central bank rate was 2.5 per cent.
The bank maintained its position Tuesday that risks to its outlook are tilted to the downside because of global imbalances. It said that while the Canadian economy is now operating at "just above its production capacity," growth in 2007 and 2008 will be a little weaker that they expected in April.
"The additional strength that has developed in domestic demand is expected to persist into next year, but this should be more than offset by a weaker outlook for net exports, owing primarily to the recent strength of the Canadian dollar," the bank said.
"With some anticipated moderation in U.S. growth, combined with past interest rate and exchange rate increases, the Canadian economy is projected to return to its production capacity by the end of 2008."
Avery Shenfeld, a senior economist at CIBC World Markets Inc., said that while bank's statement would weigh on the loonie in the near-term, it was unlikely to provoke a major selloff, given the support that the dollar has from high oil prices.
"This is good news for interest-sensitive equities," he said. "The Bank of Canada, unlike the Federal Reserve, does not seem to be panicking about a near-term uptick in inflation."
Canada's benchmark S&P/TSX composite index rose sharply and bonds rallied after the central bank's latest announcement Tuesday.
"Essentially, domestic demand has responded to the pricing signals provided by an accommodative rate structure as a means of offsetting the export drag associated with the strength of the Canadian dollar that emerged in 2003 and has persisted through to the present," said Stewart Hall, market strategist at HSBC Securities Canada.
The bank said consumer price inflation rate has risen above its 2 per cent target largely because of the increase in energy prices, while core inflation has climbed to 2 per cent faster than was expected. The bank added that it expects core inflation will remain around 2 per cent throughout 2008.
"Today's generally stand-pat statement was seen as quite dovish, and the Canadian dollar has weakened markedly and bonds have rallied - an appropriate response," Mr. Porter said. "The bank simply believes that its work is done, and needs a lot of convincing to get off the sidelines."
Economists were split on whether the central bank was going to raise its rate this time round. But expectations of an increase dropped last week when the June employment data showed a 4,600 decline in the number of jobs, countering expectations for a gain of 10,000, while unemployment held at a 32-year low of 6.1 per cent.
The target rate for overnight loans between commercial banks is set eight times a year. The next setting will take place on Sept. 6. Most economists believe there will be one more rate increase before the end of 2006.
The bank said it will update its economic outlook when it releases its latest monetary policy report Thursday.
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