Bank of Canada Keeps Key Rate at 4.25 %

The Bank of Canada (BoC) kept its main interest rate unchanged for a 5th meeting, saying there's less risk to the economy of an export slowdown.

The target rate for overnight loans between banks remains 4.25 %, the highest since August 2001 and 1 % point less than the U.S. Federal Reserve's target.

Canada's economic growth will accelerate to a 2.5 % annualized pace in the first half of the year, central bankers said today, after declining to 1.6 % in the second half of 2006 as exports to the U.S. slowed. Domestic demand has remained strong and exporters have adjusted to a drop in demand from the U.S., Canada's biggest market, the bank said.

Policy makers seem to think that the worst is behind the Canadian economy. It may well suggest there is little scope for any further reduction in interest rates.

Bank of Canada has kept rates unchanged since May because a high dollar slowed exports, helping control inflation in an economy overstretched by record demand for new homes and energy. His next move may depend on how exports fare this year or if there's a shift in the job market, where unemployment is the lowest in three decades.

Consumers have spent their new paychecks on new homes, driving prices up 11 % in November from a year earlier. Consumer spending and home prices create the risk that inflation may move above his 2 % target.

Inflation minus eight volatile items such as fruit and gasoline rose 2.2 % in November from a year earlier, led by food and shelter costs. Permits for new buildings rose to a seasonally adjusted record C$6.3 billion in November, suggesting housing costs may increase further.