OTTAWA — The Bank of Canada kept its key interest rate on hold Thursday, as expected, but said while the outlook for the Canadian economy has “marginally improved,” household debt “remains the biggest domestic risk.”
The central bank acknowledged, in the statement accompanying its rate decision, that “heightened uncertainty around the global economic outlook has decreased,” since its monetary policy report in January.
“With tentative signs of stabilization in European bank funding and sovereign debt markets, conditions in global financial markets have improved and risk aversion has decreased,” it said.
“However, the global economy is still expected to grow below its trend rate as the deleveraging process in advanced economies proceeds.”
The Bank of Canada said the outlook for the domestic economy “is marginally improved” since its January report. “Although the economy will likely grow faster than forecast in the first quarter due to temporary factors, underlying economic momentum remains around trend, balancing domestics strength and external weakness.”
As for inflation, the bank said “the profile . . . is somewhat firmer than previously anticipated as a result of reduced economic slack and higher oil prices.”
“After moderating in the second quarter, total inflation is expected, along with core inflation, to be around 2% over the forecast horizon, . . . “
The central bank has held its benchmark lending rate at a near-record low 1% since September 2010, in an effort to bolster the economic recovery from the 2008-09 recession.
But cheaper borrowing costs — especially for mortgages — have led to record high consumer debt. Bank of Canada governor Mark Carney, along with Finance Minister Jim Flaherty, has urged consumers not to borrow beyond their needs, as interest rates will eventually begin rising again.
“Canadian household spending is expected to remain high relative to GDP as households add to their debt burden, “which remains the biggest domestic risk,” the bank said Thursday.
The Bank of Canada’s next interest rate decision will be on April 17.