Money too Loose Continues

in Bank of Canada, Bank Rates

Born too Loose

I saw that as a tattoo once on a young lady and asked what it meant, and she said, “You know, I am a rebel so I am not going to succeed in society, so I was Born to Lose“.  I smiled had a careful re-check of the tattoo and complimented her on her choice of phrases, but that has nothing to do with the Bank of Canada’s interest rate decision yesterday.

Loose Money

Yes, the Bank’s money policy continues on it’s Loose Money ways, that is for sure, with the Bank keeping it’s key overnight rate at 1.0% and thus it’s Bank Rate is at 1.25% and it’s savings rate is at 0.75%, same as it has been for a while, which is a relief for those who are carrying debt right now.

To quote the report that came with this announcement:

The recovery in Canada is proceeding at a moderate pace, although economic activity in the second half of 2010 appears slightly weaker than the Bank projected in its October Monetary Policy Report. In the third quarter, household spending was stronger than the Bank had anticipated and growth in business investment was robust. However, net exports were weaker than projected and continued to exert a significant drag on growth. This underlines a previously-identified risk that a combination of disappointing productivity performance and persistent strength in the Canadian dollar could dampen the expected recovery of net exports.

In other words, we are afraid to raise interest rates just yet because the North American economy in general, and Canada’s economy in specific is far to fragile to be able to absorb a tighter monetary policy (for now). The report goes on to say that in “…broad terms…” inflation is in line with the Bank’s views (an interesting term to use, sounds like they are hedging their bets).

A more interesting comment was:

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. This leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in an environment of significant excess supply in Canada. Any further reduction in monetary policy stimulus would need to be carefully considered.

Again, they seem to be saying things are a little too fragile for any kind of money tightening, so we need to keep money loose for now.

How good have we had it? Have a look at the graph and see how low the rate has been for the past 10 years, remember that interest rates were at the 20% level in the 80’s, and don’t say that can’t happen again, because it can.

Bank of Canada Overnight Rates

Overnight Rate Graph from 2000-2010

{ 5 comments }

  • Credit Cards Canada December 14, 2010, 9:16 AM

    We are too dependent on the US for all our trade. The recent visit by our leaders to the asia and south asia to build trade relations is a good step forward diversifying our trade.

    Reply
  • Kevo December 11, 2010, 10:19 PM

    You really have to brush up on your apostrophe usage. Made for some confusing reading.

    Reply
  • CanadianInvestor December 11, 2010, 4:01 AM

    Excellent post, love the analogy. The parallel breaks down when we realize that, unlike the young lady, there is no convergence of the loose and lose person or organization when it comes to interest rates – i.e. The too-loose BOC and to-lose consumer/joe public. If only Marc Carney could be made to directly and personally bear the consequences of his decisions then we might have a different policy.

    Reply
  • Financial Cents December 9, 2010, 8:09 AM

    Good post and great reminder BCM.

    Cheers,
    Mark from My Own Advisor

    Reply
  • Joe December 9, 2010, 2:09 AM

    That graph is crazy. How could interest rates have possibly varied so much in just ten years?

    Reply

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