Sunday, September 12, 2010

Bank of Canada's Interest Rate Hike

Economists have been predicting with about sixty percent likelihood that September 8th, the Bank of Canada would raise rates again by another quarter point. It turns out, the economists were right. The BoC has announced that the overnight rate will increase by an additional quarter percentage point to 1 percent. The real question now is what this means for the economy as a whole, and the housing market in particular.

With the increase to 1 percent for the overnight rate, the Bank Rate is correspondingly 1.25 percent, and the deposit rate is .75 percent. Financial conditions in Canada have tightened modestly since April, with the changing monetary policy measures, but overall still remains highly simulative from a global perspective. This increase is consistent with the previously stated objective of achieving a 2 percent inflation target by next year. The global economy and Canadian economic indicators are what drove today’s decision to increase the rate. Canada’s economic recovery is expected to be more gradual that the July Monetary Policy Report had suggested, although the dynamics of inflation have remained fairly consistent.

The Bank of Canada’s second quarter projections were slightly more optimistic than how economic activity panned out, however consumption and investment has evolved in line with targeted expectations. Accommodative credit conditions due primarily to sharp declines in global bond yields in recent weeks support the expectation that consumption growth will remain solid and business investment in Canada will rise strongly.

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