Summary: The Bank of Canada has announced that its target for the overnight rate will remain at 0.25 per cent and has further reiterated its commitment to hold the overnight rate at this level until the end of the second quarter of 2010. The overnight rate is the rate at which major participants in the money market borrow and lend funds to each other for one day. Other benchmark rates like the prime rate are generally expected to follow the Banks decisions to raise or lower the overnight rate target.
Analysis: In its latest release, the Bank of Canada indicated that the economy and related consumer price inflation is growing more or less in line with projections published in its October Monetary Policy Report. The Bank still foresees consumer price inflation moving back to its two per cent target in the second half of 2011. If this forecast holds, the Bank would be looking to increase interest rates in advance of 2011 so the rate of inflation does not overshoot the two per cent target. With this said, the Bank has identified the Canadian-US exchange rate as a key risk to its forecast. The high valued Canadian dollar vis-Ã -vis the US could result in lower than expected growth in the Canadian economy because of the negative impact on exports to the US (when the Canadian dollar is high there is less US demand for Canadian goods and services). If economic recovery proves to be slower than expected, the Bank could rethink the timing and/or size of future interest rate hikes.