Bank of Canada leaves key overnight rate unchanged at 4.50 pct

Sep 5, 2007 - The Bank of Canada said it has left its key overnight interest rate unchanged at 4.50 pct.

The decision had been widely expected given the recent financial market turmoil, in contrast to forecasts a few weeks back that the central bank would raise rates by a quarter point.

In its accompanying statement, the BoC said the recent market uncertainty could now serve to dampen domestic demand, which it said had remained "robust", buoyed by "a continuing strong labour market and higher-than-expected increases in home sales and prices".

"Recent developments in financial markets have led to some tightening of credit conditions for Canadian borrowers, which should temper growth in domestic demand," it said.

The Bank said it will continue to closely monitor evolving economic and financial developments.

Canadian total and core annual inflation, at 2.2 and 2.3 pct respectively, has continued to be above the Bank's inflation target but generally in line with its forecasts. At the same time, the pace of economic growth in the first half of the year was above the Bank's expectations, it said.

"It now appears that the Canadian economy is operating further above its production potential than was estimated in July," the BoC said in an accompanying statement.

The BoC said there are "significant upside and downside risks" to the inflation outlook. On the upside, Canadian household demand could be stronger than anticipated, while on the downside the downturn in the US housing sector could become more severe and spill over into the broader US economy.

It now appears that the US housing market slowdown will be "more pronounced and protracted", exacerbated by the turmoil on financial markets.

On balance, this "implies weaker demand for Canadian exports" than had been assumed at the time of the July Monetary Policy Report, it said.

The BoC is tasked with keeping inflation at the midpoint of its 1-3 pct target.