Bank of Canada keeps interest rates at 1 per cent

Amid an environment of growing economic uncertainty at home and abroad, Governor Mark Carney and the Bank of Canada decided Wednesday to maintain the key lending rate at 1% while declaring the need for rate hikes has “diminished.”

This is a dramatic policy turnaround as the Bank of Canada only months ago appeared poised to raise rates.

Many economists have now ruled out a move on rates until the second quarter of 2012 or even later.

"In light of slowing global economic momentum and heightened financial uncertainty, the need to withdraw monetary policy stimulus has diminished. The bank will continue to monitor carefully economic and financial developments in the Canadian and global economies, together with the evolution of risk, and set monetary policy consistent with achieving the (bank's) two per cent inflation target over the medium term."

The Canadian economy contracted by 0.4 per cent in the second quarter of this year, which the Bank of Canada said was "largely due to temporary factors."

During an appearance last month before the House of Commons finance committee, Bank of Canada head Mark Carney acknowledge the economy was slowing but said he did not expect that to lead to a recession.

He also said it was unlikely that Europe and the United States would see a major economic downturn.

The bank had earlier projected growth of 2.9 per cent in 2011 and 2.6 per cent in 2012.

On Wednesday, the central bank said that although the Canadian economy stalled in the second quarter, it still expects "growth will resume in the second half of this year."

That growth will be led by business investment and household spending, "although lower wealth and incomes will likely moderate the pace of investment and consumption growth," the bank said.

It said financial conditions in Canada have "tightened somewhat and could tighten further" if global financial conditions "continue to deteriorate."

Also, the bank said Canadian exports are "expected to remain a major source of weakness, reflecting more modest global demand and ongoing competitiveness challenges, in particular the persistent strength of the Canadian dollar."