To the surprise of the markets, the Bank of Canada decided to leave interest rates unchanged at 3.00 percent compared to the market’s forecast for a quarter point cut.
Although growth contracted by 0.3 percent in the first quarter and consumer confidence fell to a 7 year low, the prospect of higher price pressures has reduced the BoC’s dovishness. According to the central bank, “if current energy levels persist, total CPI inflation will rise above 3 percent later this year.” Therefore the current level of interest rates is “appropriately accommodative.” On growth, the BoC is not too worried as they believe that the economy has moved into excess supply. As a result, they expect growth to pick up this year and accelerate in 2009. The Bank of Canada was the last central bank expected to ease interest rates and now that they too have succumbed to inflationary pressures.