Bank of Canada’s hands tied by global economy?

Surprising no one, the Bank of Canada yesterday kept its benchmark overnight rate at 1%. Citing the sorry state of the global economy ó a deeper and longer recession in Europe than anticipated, a slowing U.S. recovery and decelerating growth in China ó the central bank decided to maintain its target at 1%, where it has been since Fall 2010.

"With the target interest rate near historic lows and the financial system functioning well, there is considerable monetary policy stimulus in Canada,î the Bank said in its release. "The Bank will continue to monitor carefully economic and financial developments in the Canadian and global economies, together with the evolution of risks, and set monetary policy consistent with achieving the 2% inflation target over the medium term.î

The setting of the overnight rate is closely watched for what it portents about today's release of the Bank's Monetary Policy Report. And many economists took note of the Bank's estimates concerning economic growth ó a better-than-expected 2.4% in 2011 to be followed by 2% in 2012 and 2.8% in 2013. "The economy is only anticipated to return to full capacity by the third quarter of 2013, one quarter earlier than was expected in October,î the Bank says.

That seems to relieve some economists. As TD Bank Group economist Leslie Preston says in a report: "Our own outlook for the Canadian economy is somewhat more pessimistic over the next two years, and we view today's announcement as consistent with our call for the Bank of Canada to leave interest rates unchanged until the first quarter of 2013Ö The theme that interest rates will need to remain lower for longer remains intact.î

The one worrisome note is that low interests rates will "buttressî consumer spending and housing activity. "Household expenditures are expected to remain high relative to GDP,î the Bank said in its releases, "and the ratio of household debt to income is projected to rise further.î

That seems to be a condition that the Bank and economists are willing to accept in the current global economy.