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Bank of Canada holds key rate on optimism of U.S. rebound

The Governor of the Bank of Canada Stephen Poloz speaks during a media conference at Western University in London, Ontario on Tuesday, February 24, 2015.

Peter Power/The Globe and Mail

Many economists are worried the U.S. economy won't bounce back from its first-quarter stall, but Stephen Poloz isn't one of them.

The Bank of Canada opted against another rate cut Wednesday and kept its key overnight interest rate unchanged at 0.75 per cent, pointing to an imminent rebound in the United States.

"The bank expects a return to solid growth in the second quarter [in the U.S.]," the central bank said in a statement. "This will help advance the rotation of demand in Canada toward more exports and business investment."

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The bank acknowledged there is still "persistent" slack in the Canadian economy and that U.S. performance was "weak" in the first quarter, but apparently not enough to justify lower rates.

Most economists now expect the bank to hold the line on interest rates for a while unless economic conditions deteriorate significantly. Mr. Poloz roiled markets in January with a surprise quarter-percentage-point cut – insurance, the central bank Governor said at the time, against the damage from the plunge in oil prices.

"After the extreme drama early this year, Bank of Canada policy has settled back into a mundane routine," Bank of Montreal chief economist Douglas Porter said in a research note. "The Bank is keenly awaiting any new news from the incoming data."

The central bank also said Wednesday that consumption is "holding up relatively well" despite the shock to the economy from the oil price collapse.

The bank did express some concern about the recent jump in global bond yields and the partial bounce-back in the Canadian dollar. "If these developments are sustained, their net effect will need to be assessed as more data become available in the months ahead," the bank said.

For now, credit conditions remain "highly stimulative" for Canadian households and businesses, it said.

"The bank is sticking to its upbeat outlook, but keeping an eye on risks," according to a Bank of America Merrill Lynch research report.

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The bank also repeated Mr. Poloz's contention that "underlying trend" inflation is running at 1.6 to 1.8 per cent a year, still well below the bank's 2-per-cent target. Core inflation, which strips out volatile energy and other prices, is above 2 per cent. But the bank said that's largely because of temporary factors, including higher import prices caused by a cheaper Canadian dollar.

The announcement marks the third time since January that the bank has left its key rate unchanged.

Like the United States, Canada's economy stalled in the first quarter. But Mr. Poloz has suggested that the rest of the year will be much better – largely because he believes a strong U.S. will continue to power the global economy.

This Friday, Statistics Canada is due to release its estimate of gross domestic product in the first three months of the year.

Wednesday's statement suggests the bank is relatively comfortable with its most recent forecast, issued in April, which called for no growth in the first quarter, followed by growth of 1.8 per cent, 2.8 per cent and 2.5 per cent in the next three quarters.

Mr. Poloz has said he expects the central bank to get back to full capacity in late 2016.

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The Bank of Canada isn't due to release its next quarterly forecast until July 15, its next scheduled rate announcement.

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