Canada faces an uncertain international economic situation with European and U.S. debt concerns dominating the fiscal landscape, the central bank said Tuesday in announcing its decision.
"The U.S. economy has grown at a slower pace than expected and continues to be restrained by the consolidation of household balance sheets and slow growth in employment," the bank said in a press release.
"While growth in core Europe has been stronger than expected, necessary fiscal austerity measures in a number of countries will restrain growth over the projection horizon."
Growth versus inflation
Economists had split as to whether the bank would raise its overnight borrowing rate or keep the trend-setting interest rate at its current, record-low level as the July decision approached.
Late last year, Bank of Canada governor Mark Carney talked extensively about the need for Canadians to rein in their personal debt levels, a signal many experts interpreted as the central banker about to get tough on rising prices.
Indeed, many economists began predicting that the bank would boost rates in July, especially after three months — March, April and May — when inflation popped above the central bank's one-to-three-per-cent target range for price growth.
Greek debt riots indicate growing unrest over Europe's financial crisis. On Tuesday, the Bank of Canada pointed to the crisis over U.S. and European debt as it kept its bench-mark overnight interest rate steady at one per cent. (Petros Karadijas/Associated Press)
Carney, however, began signaling a change of sentiment in June when he talked about the financial "headwinds" Canada faced in an interview with the Wall Street Journal.
His wording lead to a subtle shift in thinking among Carney watchers.
"The hard place that Carney is caught between is the growing risk that Canada’s economy will underperform expectations if U.S. demand remains weak and/or Europe's credit crisis erupts and spews lava across global financial markets," said BMO Capital Markets economist Sal Guatieri in a commentary prior to Tuesday's rate announcement.
Economic growth — something central bankers are trained to generally ignore — began pushing out concerns over rising prices in the bank's thinking, experts said.
Still, many economists believe the Bank of Canada will boost interest rates towards the end of 2011 as long as the Canadian economy keeps to its current decent GDP growth path.
RBC Economics, for example, currently predicts that Canada's economy will grow at a 3.2 per cent clip in 2011, equal to the growth rate for 2010.
Europe and America
There are growing fears that the Greek debt crisis is spreading to other European countries, especially the continent's third biggest economy — Italy.
As well, the administration of U.S. President Barack Obama has so far failed to reach a deal with the U.S. Congress over whether to raise Washington's borrowing ceiling.
Failure to get an agreement by Aug. 2 risks placing the world's largest economy in technical default of it debt obligations.
Both situations hold the potential to drive the global economy back into a recession similar to the one in 2008-09 or at least to reduce the potential economic growth for most countries, experts have warned.
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