Loose Money Continues
The Bank of Canada announced yesterday that their Key Overnight Rate will stay at 1% for now, and it does not sounds like a rate increase is likely in the near future.
The recovery in Canada is proceeding slightly faster than expected, and there is more evidence of the anticipated rebalancing of demand. While consumption growth remains strong, there are signs that household spending is moving more in line with the growth in household incomes. Business investment continues to expand rapidly as companies take advantage of stimulative financial conditions and respond to competitive imperatives. There is early evidence of a recovery in net exports, supported by stronger U.S. activity and global demand for commodities. However, the export sector continues to face considerable challenges from the cumulative effects of the persistent strength in the Canadian dollar and Canadaâ€™s poor relative productivity performance.
So our export and energy based economy is doing OK, with the global energy crisis looming, but we are afraid that the sudden boom in Oil sales may not counteract the drop in purchases from our biggest trading partner the U.S.? OK, that is a simplistic interpretation on my part, but if China doesn’t start buying our stuff, we had better hope for a sudden recovery in the U.S. or Canadian businesses are going to continue to hurt for the future, that is for sure.
Inflation, you may ask? Well, here is the standard statement from the Bank:
While global inflationary pressures are rising, inflation in Canada has been consistent with the Bank’s expectations. Underlying pressures affecting prices remain subdued, reflecting the considerable slack in the economy.
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.
So they now say that Inflation is here, but it is still at acceptable levels, but with Gas prices rising and it’s domino effect on the rest of the economy, they reserve the right to jump in with a quick rate increase to choke off the money supply if they need to (but that is not likely for a while).
The predictions are of a slow increase back to normal levels for Interest rates, but when is anything in the economy these days anything like normal?