Today’s decision by the Bank of Canada not to hold the line on interest rates should mean no major increases until late next year or early in 2005, economists said.

“One thing is clear from today’s missive – even if the economic landscape does pan out in such a way that further rate cuts prove unwarranted, any interest-rate hikes are still a long way off, most likely not before the third quarter of 2004,” said TD Financial Group senior economist Marc Lévesque.

Derek Holt, assistant chief economist at RBC Financial Group, is even more optimistic. “Overall, the tone of this [Bank of Canada] report reinforces our belief that short-term interest rates are on hold until at least the mid-point of next year with major increases not in sight until 2005.”

The Bank of Canada held its overnight rate at 2.75%, which also left the bank rate at an even 3%.

In its press release, the central bank noted that core consumer price inflation has fallen below its 2% inflation target and the risks point to even weaker inflation in the near term. The release also acknowledged that economic growth was weak in the third quarter principally due to an inventory correction whereas final domestic demand was strong. The bank noted that downward revisions to growth recorded earlier in the year coupled with weakness in the third quarter has now postponed the point at which supply and demand conditions in the overall economy pose a threat to price inflation which it does not expect to return to the 2% target for another year and a half.

Lévesque said in a report that the bank “is visibly keeping its options wide open on the interest-rate front – and is clearly not ruling out the need for further monetary easing down the road.”

Lévesque said that while the bank acknowledged that recent Canadian economic indicators have been encouraging, it also noted that the amount of excess capacity in the economy (as measured by the output gap) is now larger than had been estimated in its October Monetary Policy Report, thanks to a weaker-than-expected performance in the third quarter of the year, and revisions to the GDP tally for the two previous quarters.

As a result, he said, “the bank will be looking for economic growth ‘solidly’ above 3% over the next few quarters, and although the ingredients are slowly falling into place for that scenario to play out, it is nowhere near being locked in stone. And, beyond the final quarter of the year – when it expects the Canadian economy to snap back forcefully – the bank is clearly uncertain about the extent to which the U.S. rebound will provide a strong enough tow to its Canadian counterpart to wipe out the economy’s excess slack by early 2005.

Holt noted that with a booming U.S. economy, recovering labour markets in both countries, strong consumer spending and business investment in Canada, and no inflationary pressures anywhere in sight, the bank’s decision to leave the overnight rate unchanged “comes as a surprise to almost no one.”

Sherry Cooper, chief economist for BMO Nesbitt Burns Inc., said leaving the rate unchanged was the prudent move. “A rate cut now would have been like trying to start a fire to stay warm while a forest fire (the U.S. economy) was busily raging outside the cabin. This is the last meeting date of the year, and means that the overnight rate ended 2003 where it began the year.”

Not everyone agreed with the bank’s decision. The Canadian Labour Congress said the bank “made the wrong decision” by not lowering rates. “Reducing the 1.75 percentage point interest rate differential between ourselves and the U.S. would have helped bring the soaring loonie back to earth and thus saved jobs which will now be lost,” said CLC president Ken Georgetti. The CLC has been telling the bank for some time that manufacturing and export jobs are vulnerable because our dollar has gone up too far, too fast.

Meanwhile, the Canadian dollar was off 0.02¢ at US76.70¢ after the bank decision.