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Interest Rates Hover July 2009

in Bank, Bank of Canada, Bank Rates, Inflation

Interest Rate Remain the Same

To no ones surprise the key overnight rate from the Bank of Canada was kept at the ludicrously low rate of 0.25% today.

The reasons behind this decision are:

The dynamics of the recovery in Canada remain broadly consistent with the Bank’s medium-term outlook in its April┬áMonetary Policy Report (MPR). Stimulative monetary and fiscal policies, improved financial conditions, firmer commodity prices, and a rebound in business and consumer confidence are spurring domestic demand growth. However, the higher Canadian dollar, as well as ongoing restructuring in key industrial sectors, is significantly moderating the pace of overall growth.

Some of the early strength in domestic demand represents a bringing forward of household expenditures, which modestly alters the profile of growth over the projection period relative to the April MPR. The Bank projects that the economy will contract by 2.3 per cent in 2009 and then grow by 3.0 per cent in 2010 and 3.5 per cent in 2011, reaching production capacity in the middle of 2011.

Total CPI inflation declined to -0.3 per cent in June and should trough in the third quarter of this year before returning to the 2 per cent target in the second quarter of 2011 as aggregate supply and demand return to balance. Core inflation held up at 1.9 per cent in the second quarter of 2009. The Bank still expects core inflation to diminish in the second half of this year before gradually returning to 2 per cent in the second quarter of 2011.

OK guys, don’t give yourself whiplash patting yourselves on the back. Low rates have meant continued consumer spending, and yes inflation is low, but the fact the economy is going to shrink this year and allegedly will grow next year is hardly reason to celebrate. What happens with this recovery, inflation, maybe?

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