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Bank of Canada

Rates expected to stand firm, sticky inflation aside Add to ...

This week is a big one for the Bank of Canada, but not for the reasons you might think.

On Tuesday, Governor Mark Carney will almost certainly leave his benchmark interest rate at 1 per cent for a ninth consecutive decision, continuing a pause that started more than a year ago and which could stretch all the way through most of 2012. What little drama there was in the decision was snuffed out by last Friday’s hotter-than-expected inflation readings for September, which signalled that the outlook would have to darken dramatically for the bank to cut borrowing costs.

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The statement accompanying the rate decision will include a rough sketch of the bank’s quarterly Monetary Policy Report, which is due for release Wednesday morning and is all but guaranteed to downgrade projections for Canada, the U.S. and Europe.

Financial markets, though, have been anticipating those weaker forecasts for months, given the sputtering U.S. rebound and European policy makers’ sporadic response to the euro-zone debt crisis. In any case, the bank’s latest survey of Canadian businesses, released Oct. 17, showed that while executives are worried about the uncertain backdrop, they’re still planning to hire and still taking steps to bolster their competitiveness over the long haul.

So, the most telling aspect of the rate statement and forecast paper may be whatever Mr. Carney adds to what he has already said about why he thinks the bank is on solid ground leaving rates at near-emergency lows despite sticky inflation. September’s readings, reported by Statistics Canada, suggest core inflation – which strips out volatile items like gasoline and some fresh foods – could top the bank’s 2 per cent target for the last months of the year, and maybe longer.

Mr. Carney and central bankers throughout the developed world have (wisely) judged that making sure the recovery doesn’t backslide is more important than being precisely on target. Plus, he has asserted that his mandate affords him “considerable flexibility” in how long he takes to bring inflation back to 2 per cent. He has said this also means he can leave rates low even after all the slack in the economy is gone, if necessary to fortify Canada against “global headwinds.”

In the current environment, it’s understandable for policy makers to choose to fight inflation less aggressively than they might in normal times. But as Mr. Carney and Finance Minister Jim Flaherty work on a new five-year inflation-targeting agreement that is expected to stress flexibility and possibly outline the types of situations in which the central bank might use it, look for the forecast paper to go a little further in preparing that ground.

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