Bank of Canada holds rates, scraps talk of hike

The Bank of Canada kept its key interest rate on hold on Wednesday, as expected, and suggested that it could stay on the sidelines if the credit market turmoil tempers red-hot economic growth. The bank abandoned any reference to the need for a “modest further increase” in rates — a comment it made when it raised rates in July.

Instead, it said the current level of its overnight target was “appropriate.” “I think the key point is that the bank made no mention about the possible need for further interest rate hikes even well down the road,” said Doug Porter, deputy chief economist of BMO Capital Markets.

“They have left the door open for moves on both sides.” In a statement that was more balanced than many predicted, the central bank said the Canadian economy grew faster and operated further above its production potential than had been expected, and inflation remained above target. But it switched its focus from inflation-fighting to the possible impact on growth of the meltdown in the U.S. subprime mortgage market in the coming months.

Not only will tighter borrowing conditions for Canadians bite into robust domestic demand, but U.S. demand for Canada’s exports could shrivel. “When a third of your GDP is destined for the U.S. and one of your biggest exports is lumber, you can’t afford to ignore that,” said Capital Economics in a research note.

“The upshot is that we think the Bank of Canada is now on hold for the foreseeable future.” The Bank of Canada’s new stance comes as central banks around the world are reassessing their outlooks and pouring money into markets to ease the liquidity squeeze. Federal Reserve is seen cutting the Fed Funds rate on September 18 from its current 5.25 percent. Australia kept rates unchanged on Wednesday and markets expect the European Central Bank and the Bank of England to do the same on Thursday.

The bank said it would have to determine how much credit conditions had tightened in Canada — and to what extent that was hurting economic growth — when it made future interest rate decisions on October 16 and on December 4. “They’ve painted themselves out of a corner. In the last two statements … they pre-committed to a hike and the recent volatility that we’ve seen has shown us that that is not a good position for a central bank to be in,” said Meny Grauman, economist at Scotia Capital.