The Bank of Canada (BOC) maintained its target for the overnight rate at 1.0 percent, as expected, and said "the considerable monetary stimulus currently in place will likely remain appropriate for a period of time after which some modest withdrawal will likely be required" due to continued economic slack, a muted outlook for inflation and a continued improvement in household imbalances.
The BOC's forward rate guidance, the last one issued by Governor Mark Carney who will be taking over as Bank of England governor on July 1, is exactly the same as in April.
The BOC said Canada's first quarter economic growth is expected to be stronger than it had projected in April, but growth for the full year is still expected to remain broadly in line wit its forecast. Official data for first quarter Gross Domestic Product will be released on Friday.
In its April monetary policy report, the BOC cut its 2013 growth forecast to 1.5 percent from an earlier forecast of 2.0 percent, and forecast 2014 growth of 2.8 percent.
Consumer spending is forecast to grow at a moderate pace, business investment should grow solidly while residential investment should decline further from historically high levels, the BOC said.
"Growth in total household credit is slowing and the bank continues to expect that the household debt-to-income ratio will stabilize near current levels," the BOC said.
Exports are forecast to continue to recover but they will be restrained by subdued foreign demand and "ongoing competitiveness challenges, including the persistent strength of the Canadian dollar," the BOC said, adding that global growth was evolving largely as forecast in April with global economic activity expanding modestly this year and then strengthening in the next two years.
Canada's economy grew by an an estimated 1.8 percent in 2012, down from 2.6 percent in 2011, and in the fourth quarter of 2012 Gross Domestic Product grew by an annual 1.0 percent, the lowest rate in three years and down from 1.5 percent in the third quarter.
Inflation in April eased to 0.4 percent, the lowest since November 2009, and the BOC said it expected total and core inflation to remain subdued in coming quarters before slowly rising to its target of 2.0 percent by mid-2015 as the economy returns to full capacity.
In April 2012 the BOC started to warn that it would have to raise interest rates at some point to keep inflation at bay and due to concern of a continued rise in household debt. But households started to rein in spending as economic growth slowed in the second half of 2012 and in January this year the BOC conceded that a rate rise was less imminent than expected.
The bias toward tightening rates and normalizing monetary policy from the considerable stimulus that has been in place since the Global Financial Crises continued in March, April and now May. Economists currently expect the BOC to keep its rate on hold until the fourth quarter of 2014.
Carney will be replaced as governor by Stephen Poloz on Monday. Poloz, who used to work at the BOC, joined Export Development Canada in 1999 and became chief executive in 2011.
Carney became BOC governor in 2008 and was credited with steering Canada relatively unscathed through the global financial cries. He introduced the policy of issuing rate guidance to give clarity to financial markets about the likely path of interest rates, a policy that has been adopted by many central banks around the world, including the U.S. Federal Reserve.
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