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The Bank of Canada held its trend-setting Bank Rate at 1.25 per cent on May 31, 2011. This marks the sixth consecutive policy rate announcement for which interest rates have been kept on hold.
 
The Bank now sees headline inflation as staying above 3 per cent in the short term. It nonetheless maintained its inflation outlook included in its April Montary Policy Update, which indicated that inflation in Canada would hit two per cent by mid-2012.
 
“The Bank sets rates based on an inflation target of between one and three per cent, and it normally leans against inflation by raising interest rates. Leaving rates on hold in the face of higher inflation will likely become a communication challenge for the Bank,” said Gregory Klump, Chief Economist for The Canadian Real Estate Association. “While the Bank said currently low interest rates will be raised ‘eventually’, there was little to suggest that the Bank is in any rush to do so.”
 
The Bank’s decision to keep its policy interest rates on hold follows recent comments by Finance Minister Jim Flaherty that he’s “quite worried” about the outlook for the global economy. However, while global risks and their potential impact on the Canadian economic outlook remain elevated, the Bank has given itself plenty of room to justify raising interest rates.
 
“The Bank said it anticipates inflation expectations to remain well-anchored. If these expecations drift higher, or if productivity fails to recover, the Bank’s hand may be forced where it will have little choice but to raise interest rates,” said Klump. “There is little doubt that higher interest rates are on the way, but what’s equally certain is they won’t be going up very far or very fast.”
 
Financial markets have recently increased bets that interest rates are on hold until at least September. The prevailing view among economists is that the Bank Rate will be no more than three-quarters of a percentage point above its current level of one per cent.
 
As of May 31, 2011, the advertised five-year lending rate stood at 5.59 per cent. This is down onetenth of a percentage point from 5.64 per cent on April 12 th, when the Bank made its previous policy interest rate announcement.

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Simon Fraser
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