Canada holds key rate steady

Canada's central bank left its key interest rate unchanged on Tuesday as a slowing global economy weighs on growth in Canada.

The Bank of Canada, which held its benchmark rate at 1.0 per cent, said it expects the recession in Europe to be deeper and longer than it previously expected.

The bank said the pace of growth in Canada is expected to be more modest than previously envisaged, largely due to Europe, the US and because Chinese growth is decelerating toward a more sustainable pace.

"While the economy had more momentum than anticipated in the second half of 2011, the pace of growth going forward is expected to be more modest than previously envisaged, largely due to the external environment," the bank said in a statement.

Historic lows

The bank also reiterated that interest rates are at historic lows and there is considerable monetary policy stimulus, suggesting there won't be a rate cut soon.

The decision to leave interest rates unchanged was widely expected.

The central bank has left the key rate unchanged for 11 consecutive meetings since September 2010. In the summer of 2010 Canada became the first nation in the Group of Seven to raise interest rates since the crisis began.

Canada's commodity-rich economy has fared better than other nations in the G7, which groups industrialised nations. There was no mortgage meltdown or subprime lending crisis in Canada, and its banks are rated among the soundest in the world.

The bank said the second half of 2011 was better than it had previously thought with growth of 2.4 per cent, slightly higher than its October projection.

For this year, the bank said growth will average one notch higher at 2.0 per cent and in 2013, one notch lower than the previous forecast at 2.8 per cent.

Mark Carney, a former Goldman Sachs executive who heads the central bank, has repeatedly warned that Canadians are taking on too much debt because of the historic low borrowing costs.

He noted in the statement that the ratio of household debt to income is projected to rise further. Last week, the Bank of Montreal dropped its fixed five-year mortgage to 2.99 per cent, the lowest in modern Canadian history.

Peter Buchanan, senior economist at CIBC, said there is no indication that the central bank is thinking about shifting away from the current "wait and see" stance anytime soon.

He expects the bank to leave the rate unchanged until at least early 2014.

- AP