Canada keeps key interest rate at 1%

The Bank of Canada kept its main interest rate unchanged and said borrowing costs will increase as the economy recovers, with policy makers dropping the word “eventually” to describe the timing of their next move.

The target for overnight loans between commercial banks remained 1 percent, where it’s been since September, as forecast by all 26 economists surveyed by Bloomberg News. The Ottawa- based bank also raised its outlook for so-called core inflation and affirmed the economy will reach full output by the middle of 2012 while trimming this year’s growth forecast.

“To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be withdrawn,” the central bank said in a statement. “Such reduction would need to be carefully considered.”

The Canadian dollar and bond yields rose as investors bet today’s statement could mean rate increases come sooner than previously forecast. Policy makers led by Governor Mark Carney, 46, focused on faster inflation at home as well as Europe’s debt crisis and a weak U.S. economy. The annual inflation rate was 3.7 percent in May, the fastest since 2003 and above the bank’s 2 percent target.

Source: BusinessWeek.com