Spooked by skyrocketing energy prices, the Bank of Canada has suddenly reversed its interest-rate policy.
Governor Mark Carney caught everyone off guard yesterday by announcing the central bank's trend-setting rate would remain unchanged at 3 per cent, ignoring widespread calls for the bank to continue its string of rate cuts that started last fall.
In making its decision, the bank weighed economic weakness such as Ontario's shrinking manufacturing base against inflationary pressure building up due to soaring prices for oil and other commodities. Inflation won, leaving Ontario businesses without the rate relief many have been pleading for.
Yesterday's about-face reflected the bank's challenge of steering the economy of the entire country even as specific regions show divergent economic trends. While Ontario is in a slump, resource-rich provinces such as Alberta are riding high.
"If there were such a thing as the Bank of Ontario, they would have been cutting rates today," said BMO Capital Markets deputy chief economist Doug Porter.
In its statement, the bank said its interest rate policy is appropriate to "bring aggregate demand and supply into balance and to achieve the 2 per cent inflation target." Several economists predicted the bank will stand pat on interest rates until next year and could begin to raise rates in 2009.
Though the bank acknowledged the weakness in Canada's economy from the near-recessionary situation in the United States, Carney left no doubt that he was more worried about the potential for runaway inflation at a time when crude oil has hit $130 a barrel.
"Overall, global growth has been stronger and commodity prices have been sharply higher than expected," the bank said.
It said that "if current levels of energy prices persist," the consumer price index will rise later this year above 3 per cent.
Carney has called a 2 per cent target for fighting inflation his most important goal.