Published Thu, Jan 19th, 2012

Bank of Canada Interest Rate Decision - January 17, 2012

For the 11th consecutive meeting, the Bank of Canada opted to hold its target overnight rate at 1 per cent. In the statement accompanying the decision, the Bank noted that the global economic outlook is deteriorating, largely due to an expected deep and prolonged recession in Europe. While the Bank expects the Euro-crisis to be contained, it will impact the Canadian economy this year, and the Bank is forecasting GDP growth of just 2 per cent in 2012. On inflation, the Bank anticipates that both total and core inflation will moderate this year before rising to 2 per cent by the third quarter of 2013.

Our view of the economy is largely in-line with the Bank of Canada, indeed our forecast for economic growth is almost identical. The Canadian economy is likely to face a number of headwinds in 2012, both externally from the Euro-debt saga and an uncertain US economy, and internally as traditional sources of growth begin to fade. Indeed, it is difficult to see where economic growth will come from in 2012 if, as expected, Canadian consumption slows , Governments begin address fiscal gaps and residential construction moderates. This leaves private business investment to drive the economy, but given a murky demand outlook, it is far from certain that businesses will be in the mood to take on significant new projects. Given the extent of downside risks to the Canadian economy, it is unlikely that the Bank of Canada will move on interest rates in 2012. Moreover, long-term rates will remain at historically low levels until confidence is restored in the sovereign debt of Europe.

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