Interest rate holds steady over high oil price concerns

OTTAWA—The Bank of Canada held its key borrowing rate unchanged at 1 per cent amid concerns that high oil prices could undercut the current uptick in global economic conditions.

Bank governor Mark Carney said Thursday there are signs that Europe and the United States are beginning to overcome the troubles that have held back the world recovery.

But these improvements and jitters over Middle East oil supplies that have seen gas prices in Canada climb past $1.25-per-litre could hinder the recovery.

“Commodity prices are higher than anticipated, supported by improved global economic conditions and a geo-political risk premium on oil,” Carney said in a statement accompanying the central bank’s rate-setting decision.

“If sustained, the latter could ultimately dampen the improvement in global economic momentum.”

However, the Bank said “the heightened uncertainty around the global economic outlook has decreased” since January: “With tentative signs of stabilization in European bank funding and sovereign debt markets, conditions in global financial markets have improved and risk aversion has decreased.

“The U.S. expansion is proceeding at a modest pace, reinforced by recent improvements in the labour market,” the statement added.

Nonetheless, Carney concluded, the process of winding down debt in the advanced economies means “the global economy is still expected to grow below its trend rate.”

Still, it all adds up to a slightly better outlook for Canada, said the Bank, which predicted in January that the Canadian economy would expand by a modest 2 per cent this year.

“Although the economy will likely grow faster than forecast in the first quarter due to temporary factors, underlying economic momentum remains around trend, balancing domestic strength and external weakness,” Carney said.

He warned again that consumer indebtedness in Canada could prove to be a problem when interest rates eventually rise. “Canadian household spending is expected to remain high relative to (economic output) as households add to their debt burden, which remains the biggest domestic risk,” the statement said.

TD Bank said the bank is likely to keep interest rates in Canada low throughout this year and perhaps until mid-2013.

The next scheduled date for announcing the bank’s trend-setting overnight rate is April 17.

Original Article
Source: Star
Author: Les Whittington