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article imageBank of Canada maintains overnight rate at 1%, head warns of debt

By Andrew Moran     Jan 17, 2012 in Business
Ottawa - The Bank of Canada announced on Tuesday that it is maintaining the overnight rate at one percent. Furthermore, Mark Carney, head of the central bank, warned of consumers increasing their debt faster than their incomes.
It was reported last month that the Bank of Canada would keep its overnight rate at one percent amid the deepening euro sovereign debt crisis. Bank of Canada head Mark Carney expressed concern in the same report over the international financial markets.
On Tuesday, the Canadian central bank issued a media release in which it stated that it is keeping its overnight rate at one percent because the global economy has depreciated and uncertainty has spiked since it released its October Monetary Policy Report.
Citing the intensity in the European recession, the overseas sovereign debt crisis and the increase in domestic household debt, the central bank said expected growth will be more modest than previous projections.
The Bank of Canada believes the economy in 2011 grew by 2.4 percent. This year, though, it projects that it will grow by only two percent and then 2.8 percent the following year. Central bank experts say the economy will return to “full capacity” by the third quarter of 2013, which is one quarter earlier than first estimated.
“Very favourable financing conditions are expected to buttress consumer spending and housing activity,” the report stated. “Household expenditures are expected to remain high relative to GDP (gross domestic product) and the ratio of household debt to income is projected to rise further.”
Periodically, Carney has warned Canadian households that they are taking on too much debt. The figure of household debt to disposable annual income has reached an all-time high of 153 percent. Consumers, though, have taken on extra debt due in part to low interest rates in the bank’s monetary policy.
“With the target interest rate near historic lows and the financial system functioning well, there is considerable monetary policy stimulus in Canada,” the report added. “The Bank will continue to monitor carefully economic and financial developments in the Canadian and global economies, together with the evolution of risks, and set monetary policy consistent with achieving the 2 per cent inflation target over the medium term.”
A complete update on the Bank’s economic and inflation outlook will be published Wednesday. The next scheduled announcement of the overnight rate is Mar. 8.
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