MercoPress. South Atlantic News Agency

Canada leaves rates unchanged at 0.25% in spite of robust 5% growth

Strong rebound in line with neighbouring US recovery

The Bank of Canada took its first steps Tuesday toward returning the country to more normal interest-rate levels by signalling a more hawkish tone on inflation and acknowledging the economy is performing better than expected on “vigorous” consumer demand.

The messages were conveyed in the Bank of Canada's latest interest-rate statement, which kept its record-low benchmark rate of 0.25% and pledged to keep it there at least until July.

But most bank watchers took note of subtle changes in the statement, compared with previous rate announcements, and there was enough there for them to begin the countdown to rate hikes.

Among the key changes was a declaration from the bank that the risks to its inflation outlook are “roughly balanced,” and no longer “tilted slightly to the downside” — language that suggests deflation is no longer a concern and that price increases are creeping up to a level that may prompt a response.

The central bank sets its interest rates to achieve annual inflation of 2%. The most recent data for January showed inflation at 1.9%. Core inflation, which excludes volatile items such as energy, was 2%. The Bank of Canada had projected that core inflation would not reach 2% until the third quarter of next year.

The rate statement emerged a day after economic data indicated the Canadian economy grew at a robust 5% annualized pace in the final three months of 2009, blowing past market expectations for a four per cent gain and the central bank's 3.3% forecast.

Economists say the fourth-quarter performance has set the stage for another robust gain, of perhaps 4% or more, for the first three months of 2010.

In the statement, the central bank acknowledged economic activity has been “slightly higher” than its own projections, with the 5% gain in the fourth quarter powered by “vigorous domestic demand” and a recovery in exports.