Economy improving, but interest rates to stay at historic lows for now

By Julian Beltrame, The Canadian Press

OTTAWA – The Bank of Canada is keeping interest rates at historic lows for a few more months, while sending out signals that the economy is rebounding strongly and could trigger inflationary pressures.

The central bank’s more positive take on the economy followed a Statistics Canada report Monday of a surprising five per cent growth spurt in the fourth quarter of 2009 and sent a strong loonie even higher.

“The level of economic activity in Canada has been slightly higher than the bank had projected in January,” the bank said Tuesday morning before markets opened.

“The economy grew at an annual rate of five per cent in the fourth quarter of 2009, spurred by vigorous domestic spending and further recovery in exports.”

“Slightly higher” may be an understatement, as the bank had projected growth of only 3.3 per cent for the last three months of 2009.

The bank also noted that “core inflation” has been slightly firmer than projected, although it added that some of the price increases were due to transitory factors.

The governing council continued to reiterate that despite the improved conditions, they would likely leave the overnight rate where it has been since last spring – at 0.25 per cent – until at least July.

But some economists weren’t buying it and the reaction of money markets suggested that there may be some pressure on governor Mark Carney to move on interest rates ahead of schedule.

“They are getting ready to take away the punch bowl,” said Derek Holt, vice-president of economics with Scotia Capital.

“I think they are priming the markets for a second-quarter hike.”

The next interest rate announcement comes in April, but June would be a more likely time to move, said Holt, if indeed the bank is preparing to act. http://ca.news.finance.yahoo.com/s/02032010/2/biz-finance-economy-improving-interest-rates-stay-histori