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Bank of Canada increases overnight rate target to 1/2 per cent and re-establishes normal functioning of the overnight market
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U9 W5 Y9 V+ w2 V$ _1 POTTAWA - The Bank of Canada today announced that it is raising its target for the overnight+ v+ d& G7 d5 `& M! @! Y" P
rate by one-quarter of one percentage point to 1/2 per cent. The Bank Rate is correspondingly
/ R" h* j, ^' Y; o: draised to 3/4 per cent and the deposit rate is kept at 1/4 per cent, thus re-establishing the normal
7 M" _% Z) N0 Ooperating band of 50 basis points for the overnight rate.( ^% ]$ M- e5 ?6 y! s! i
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The global economic recovery is proceeding but is increasingly uneven across countries, with9 X: I |3 a, _5 U/ @/ `2 j6 z
strong momentum in emerging market economies, some consolidation of the recovery in the
0 P% p: r- I7 S8 LUnited States, Japan and other industrialized economies, and the possibility of renewed weakness
/ G7 a' M) V9 u( c" F) f4 ^in Europe. The required rebalancing of global growth has not yet materialized.
4 O" P! Z8 d. \) ]! zIn most advanced economies, the recovery remains heavily dependent on monetary and fiscal
# a& _, ~8 X$ istimulus. In general, broad forces of household, bank, and sovereign deleveraging will add to the* d" u1 I9 n* a. S& I( d2 V
variability, and temper the pace, of global growth. Recent tensions in Europe are likely to result
5 n, v k* B) Z# y7 |& min higher borrowing costs and more rapid tightening of fiscal policy in some countries - an H' b$ x- Y7 F
important downside risk identified in the April Monetary Policy Report (MPR). Thus far, the1 i) {1 Q( S( z5 h; I7 A
spillover into Canada from events in Europe has been limited to a modest fall in commodity) X! k% f& p* }$ J2 p9 y& E+ l
prices and some tightening of financial conditions.
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Activity in Canada is unfolding largely as expected. The economy grew by a robust 6.1 per cent
( P, S$ w) r, f i& iin the first quarter, led by housing and consumer spending. Employment growth has resumed.
2 H$ z8 ]- f% a& y0 GGoing forward, household spending is expected to decelerate to a pace more consistent with0 }" X* C5 i2 h% E0 n" Q$ y. I
income growth. The anticipated pickup in business investment will be important for a more
6 i2 y! j/ ^% R0 T$ a$ zbalanced recovery.) a) ?" d z6 ~! Q4 ] y& L7 H
& f' j* P9 I1 t/ DCPI inflation has been in line with the Bank's April projections. The outlook for inflation reflects% y, T$ [: b! G& w
the combined influences of strong domestic demand, slowing wage growth, and overall excess) D, D# J: a. u4 t! e1 C3 d) ~
supply.
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In this context, the Bank has decided to raise the target for the overnight rate to 1/2 per cent and# [( n4 [6 p3 x0 x
to re-establish the normal functioning of the overnight market. This decision still leaves considerable " P3 t( J/ _) W- y5 ^
monetary stimulus in place, consistent with achieving the 2 per cent inflation target in light of the $ K2 B" y* b" f4 l
significant excess supply in Canada, the strength of domestic spending, and the uneven global recovery.
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Given the considerable uncertainty surrounding the outlook, any further reduction of monetary
2 G: c4 c; |! z" N6 U6 D1 Bstimulus would have to be weighed carefully against domestic and global economic
% ?# |/ h+ h. l$ ?' h6 Qdevelopments.' G. J3 i5 k, v" S4 e0 o
9 K+ e j j! H# uInformation note:: ?7 r9 r! I/ o% X+ c L7 k
The next scheduled date for announcing the overnight rate target is 20 July 2010. A full update/ @1 k- b& H3 g) B' n
of the Bank's outlook for the economy and inflation, including risks to the projection, will be% M; o2 [* W/ i0 d' @! T0 o; }/ N
published in the MPR on 22 July 2010. |
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