E The Bank Of Canada’s Interest Rate Policy Remains Cautiously Conservative

For many years now, the Bank of Canada has followed a low-interest rate policy to support the Canadian economy in the rocky period following the Great Recession.

Since April of 2009, the target overnight policy rate has ranged between 25 basis points (BPS) and 100 BPS. The overnight rate was cut to 50BPS between July 2015 and July 2017. Recently, however, the rate was increased to 75 BPS on July 12th and then to 1% on September 6th.

At its last central bank meeting in October, the overnight rate was held at 1% even though over the past twelve months Canada had the fasted growing economy in the G7. Canada’s central bank was clearly spooked by a jump in the currency earlier in the year that was associated with the rate hikes. Consequently, the Bank indicated that it would remain “cautious” when considering future hikes.

Nonetheless there is also a broad consensus that the Bank delayed increasing rates because of the uncertainty revolving around the NAFTA talks (widely expected to hurt Canada’s economic interests) and the expectation of many economists that the recent 4.5% second-quarter GDP growth rate was unstainable, and would likely ease back over the next six months.

The Bank of Canada’s recent comments on the economic outlook also mirror what economists worry about. Why is low inflation and static wages still the norm case despite strong economic growth and unusually strong job creation?

The Canadian central bank now expects inflation not to reach its 2% target range until the second half of next year. This, of course, has cooled market expectations concerning immediate interest rate hikes.

Bank of Canada Overnight Interest Rate

 

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