The Bank of Canada left interest rates unchanged this morning as expected. The central bank is maintaining its target for the overnight rate at 2.75%.

Although the bank noted that inflation remains hot in Canada, it suggested that economic and geoploitical uncertainties are keeping it from hiking rates. “Core and total CPI inflation have remained above the Bank’s 2% target for inflation control, largely as a result of one-off price movements such as the increase in insurance premiums. The Canadian economy continues to expand, with the substantial amount of monetary stimulus in the economy supporting growth in domestic demand,” it says in its policy statement.

“However, data that have become available since the Bank’s last fixed announcement date on October 16 indicate that Canada’s economic growth in the second half of 2002 is coming in lower than previously expected, primarily because of continuing financial and geopolitical uncertainties and global economic weakness. In these circumstances, the Bank has left the overnight rate unchanged.”

Looking ahead, the Bank suggests that rates will be going higher at some point. “The Bank continues to expect a strengthening of domestic and foreign demand and the resumption of above-potential growth in the second half of 2003. Accordingly, timely removal of monetary stimulus will be required to achieve the inflation target over the medium term. The pace of monetary policy tightening will depend on economic, financial, and geopolitical developments and their implications for pressures on capacity and inflation in Canada.”

“Assuming crude oil prices remain at current levels, total inflation will likely peak at a lower level than previously expected, before returning to around 2% in the second half of next year,” it concludes. “The Bank will continue to monitor developments closely for any signs that the recent one-off price movements may be feeding into expectations of generalized price inflation.”

The Bank of Canada’s next scheduled rate decision is Jan. 21, 2003.