Highlights
The Bank of Canada surprised analysts and kept their policy interest rate unchanged at 3.0 percent. The Canadian rate is 1 percentage point above the fed funds target rate of 2.0 percent. The key rate was increased to 4.5 percent at the October 2007 meeting. Since then, the Bank has lowered its key rate at the December 2007, January, March and April 2008 meetings.

The Bank had been lowering rates amid signs that the U.S., the destination for about 80 percent of Canada's exports could slide into recession. First quarter GDP declined 0.1 percent on the quarter for the first decline since the second quarter of 2003. Retail sales have been holding up after a dreadful December but manufacturing shipments, after surprising pleasantly in both January and February took a nasty tumble in March.

The Bank of Canada has an inflation target range of 1 percent to 3 percent but focuses on the 2 percent midpoint. Inflation as measured by the CPI has remained contained, giving the Bank the latitude to adjust interest rates in response to changes in growth. Record crude oil prices have been boosting the economy and the Canadian dollar which has remained at plus or minus parity with the U.S. dollar since the fall, has declined since the negative GDP report.

In its statement the Bank said

"Since the April Monetary Policy Report (MPR), economic developments have been broadly in line with expectations. However, the balance of risks to the Bank's April projection for inflation in Canada has shifted slightly to the upside. Although the composition of U.S. growth has not been favourable for demand for Canadian goods and services, overall, global growth has been stronger and commodity prices have been sharply higher than expected. At the same time, many of the downside risks to inflation identified in the April MPR have eased, while the evolution of credit conditions has been in line with expectations. The risk remains that potential growth will be weaker than assumed.

"With the decline in first-quarter GDP, the Canadian economy is judged to have moved into excess supply, which is expected to increase this year. Consistent with the April MPR, the Bank continues to project that economic growth will pick up this year and accelerate in 2009, owing in part to a firming of U.S. demand and accommodative monetary policy in Canada.

"If current levels of energy prices persist, total CPI inflation will rise above 3 per cent later this year. However, with the Canadian economy operating in excess supply, core inflation is expected to remain below 2 per cent through 2009. Both total and core inflation should converge on 2 per cent in 2010 as the economy returns to balance.

"Against this backdrop, the Bank now judges that the current stance of monetary policy is appropriately accommodative to bring aggregate demand and supply into balance and to achieve the 2 per cent inflation target. There continue to be important downside and upside risks to inflation in Canada, which the Bank will monitor closely."