Bank of Canada shocks market, leaves rate at 3%

The Bank of Canada held its key interest rate steady at three percent on Tuesday in a surprise move and signalled an end to its rate-cutting cycle because of unexpectedly strong inflationary pressures.

"The bank now judges that the current stance of monetary policy is appropriately accommodative to bring aggregate demand and supply into balance and to achieve the two percent inflation target," the central bank said in a statement.

In April, the bank had signalled another rate cut was in the pipeline but was vague on the timing of any move.

Primary securities dealers surveyed by Reuters had unanimously predicted a quarter-point cut in the overnight lending rate.

The Canadian dollar immediately shot up to around 97.83 US cents, from  97.03 US cents, just before the announcement.

Bank of Canada governor Mark Carney joined Fed chairman Ben Bernanke and ECB president Jean-Claude Trichet in sounding the alarm on inflation, even though Canada has so far felt little pressure from global food price hikes.

Canada's central bank said there was now a greater risk that inflation would be higher than it projected in April due to stronger-than-expected global growth and commodity prices.

"The balance of risks to the bank's April projection for inflation in Canada has shifted slightly to the upside," it said. "Although the composition of U.S. growth has not been favourable for demand for Canadian goods and services, overall, global growth has been stronger and commodity prices have been sharply higher than expected."

The Bank of Canada expects total inflation to rise above three percent later this year while core inflation, which strips out volatile items, will stay below two percent through 2009. Both inflation measures are seen converging at two percent in 2010.

The rise of the Canadian dollar against the greenback has helped keep import prices low, even on many food items. However, policymakers have acknowledged that soaring gasoline prices are hurting businesses and consumers.

At the same time, the Canadian economy has slowed more quickly than the bank had anticipated.

The economy moved into excess supply in the first quarter and the gap will grow this year, it said. In April, it saw the economy moving into excess supply only in the second quarter.

The central bank's policy decision Tuesday ends a five-month rate-cutting cycle which had lowered the key lending rate by 150 basis points.

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