BoC to keep rates low

The Bank of Canada kept borrowing costs at a record low 0.25 percent today and reiterated they'll probably stay there through the middle of next year, while expressing cautious optimism that economies around the world are on the mend.

"Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010," Governor Mark Carney and his rate-setting panel said in the statement accompanying their decision.

Still, TD Securities strategist Eric Lascelles said that though maintaining the commitment to stay on hold through mid-2010 was "the most important signal," the bank's statement came across "at least slightly more hawkishly" than past versions by recognizing that the global economy is picking up and indicating less immediate concern about the impact of Canada's strong currency on exporters.

The "main drivers and the profile of the projected recovery" are unfolding as policy makers predicted they would in their last quarterly forecast in October, the central bank said, but because global economic developments since then have been "slightly more positive," the global outlook has "improved modestly."

The bank nonetheless warned that "significant fragilities remain" and sought to temper speculation that it might raise interest rates before July of 2010. The bank noted that third-quarter economic growth was held back by weak exports, and said domestic demand is carrying the load in helping the economy turn around.

Policy makers also said "persistent strength in the Canadian dollar" could be a "significant further drag on growth and put additional downward pressure on inflation." In the previous statement, however, the bank had said the loonie's ascent could "more than fully offset" recent gains in the economy.

The bank repeated that policy makers see inflation returning to their 2-percent target in the second half of 2011 and overall risks to the inflation projection "are tilted slightly to the downside," a reminder to markets that unless this changes policy makers are unlikely to speed up a return to higher interest rates.

Core inflation, a measure that strips out items with volatile prices such as fuel and fresh fruit, has come in "slightly higher" than expected in the past few months, the bank said, though total inflation is still around the bank's projections.

Carney and his deputies said nothing in the statement about the hot housing market, where some observers have said low interest rates might be fuelling a new bubble. The central bank is expected to comment on the housing market in a review of the financial system that it's scheduled to release on Thursday.

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