Highlights
As expected, the Bank of Canada kept its key interest rate at 2.5 percent where it has been since October 19, 2004. Since the Bank last boosted its rate in October, the Federal Reserve has lifted borrowing costs five times to 3 percent, making U.S. assets more attractive than Canadian-dollar denominated investments on a yield basis. Since the Bank last boosted its rate in October, the Federal Reserve has lifted its comparable rate five times, making yields for U.S. debt assets more attractive than Canadian dollar investments. David Dodge, the bank's governor, has said that the bank plans to raise interest rates "over time" to keep inflation in check. Recent reports showed a smaller-than-expected merchandise trade surplus and a decline in manufacturing jobs in March which could temper the Bank's need to increase interest rates. In its statement the Bank said

"Global and Canadian economic data received since the last interest rate announcement on 12 April have been broadly in line with expectations. The Bank's outlook for the Canadian economy through to the end of 2006 is unchanged from that in the April Monetary Policy Report (MPR). Growth this year and next is still expected to come primarily from domestic demand. Consistent with the analysis in the MPR, the Canadian economy is expected to move back to its production capacity in the second half of 2006, with core inflation projected to return to 2 per cent around the end of next year. In line with this outlook, a reduction of monetary stimulus will be required over time.

The outlook remains subject to both upside and downside risks. These risks relate largely to global developments, the associated relative price changes, and the adjustment of the Canadian economy."