Salmon Arm Shuswap area buyers take note: "Key interest rate held steady at 4.25%"

Th e B a n k o f Ca n a d a announced Tuesday it is holding its key interest rate steady at 4.25 per cent, saying that inflation has been largely in line with its expectations.

The rate has been unchanged since May, when it was raised by a quarter point. The bank’s decision Tuesday was widely expected by economists given recent modest inflation and mixed but generally favourable readings on the economy.

The 4.25 per cent overnight rate is consistent with achieving the inflation target of two per cent annually over the medium term, the bank said Tuesday in its announcement.

The central bank said that at the end of 2006, the Canadian economy was operating at, or just above, its production capacity. That helps take the pressure off the bank to cut interest rates, which some speculate may become necessary if the general slowing of the economy in the last quarter of 2006 persists into this year.

Policy makers “seem to think that the worst is behind the Canadian economy,” Craig Wright, chief economist at Royal Bank of Canada i n To r o n t o , told Bloomberg News. “It may well suggest there is little scope for any further reduction” in interest rates.

Yet, several economists are predicting the bank will need to cut interest rates by the third quarter of this year. Key to that prediction will be how Canada’s export sector, which has been struggling with the strong dollar, will fare.

The bank noted that economic growth in the United States slowed during 2006 and that as a result, output growth in Canada slowed, likely averaging about 1.6 per cent in the second half of last year.

“This was largely due to reduced U.S. demand for building materials and motor vehicles — which has adversely affected Canada’s exports — and to the need for Canadian businesses to adjust inventories,” the bank said.

The bank acknowledged that the risks on both the up side and down side had “diminished somewhat” since October. The bank still characterized the risks “around the i n f l at i o n p ro j e c t i o n a re roughly balanced.”

Total consumer price inflation should average just above one per cent in the f i rs t h a l f of 20 0 7, t h e ba n k p re d i c t s , returning to the two per cent inflation targe t i n e a rly 20 0 8 . Co re inflation should return to two per cent in the first half of 2007 and remain there, the bank said. The next interest rate announcement will be March 6.

(prepared by Megan Fitzpatrick/Vancouver Sun)