Bank of Canada sticks to guns on raising rates

OTTAWA (Reuters) - The Bank of Canada doggedly stuck to its message on Wednesday that it may have to raise interest rates despite a global slowdown, predicting the domestic economy would gain momentum this year and next and inflation return to target within a year.

The central bank held its key overnight rate at 1 percent, as expected, extending a two-year freeze on borrowing costs after it became the first Group of Seven country to lift rates from emergency lows in 2010 following the recession.

But as the U.S. Federal Reserve and other global central banks contemplate further rounds of easing, Canada repeated what it has been saying for months - that the time for removing stimulus could be near.

"To the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the 2 percent inflation target over the medium term," the bank said in its announcement, using language identical to its last two rate statements.

Market players surveyed by Reuters believe the bank will put off raising rates until the second quarter of 2013, according to a poll of financial institutions released on August 28.

The bank judges the economy's underlying momentum to be roughly in line with its growth potential, which it has said is about 2 percent, despite being held back by global headwinds and growing by an annualized rate of 1.8 percent in the second quarter.

"Economic growth is expected to pick up through 2013, with consumption and business investment continuing to be its principal drivers, reflecting very stimulative financial conditions," it projected.

The bank sees core inflation, softer than expected in recent months, returning to its 2 percent target along with total inflation over the next 12 months since the economy is operating near its potential. Core inflation was 1.7 percent and total inflation was 1.3 percent in July.

Household spending is showing tentative signs of slowing, the bank said, although the overall household debt burden continues to rise. The bank has raised the alarm over the record high household debt-to-income ratio, fueled in part by high housing prices and cheap lending rates.

(Reporting by Louise Egan and Randall Palmer; Editing by James Dalgleish)

Source: http://news.yahoo.com/bank-canada-sticks-guns-raising-rates-130056542--business.html

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