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Loose Money Continues in May for Canada

Bank Rates Hover Still

So I did promise more of my missed opportunities, but I decided to chat about the Bank of Canada and interest rates today, but worry not,gentle reader I will return to my monologue of missed investing chances tomorrow, without fail.

The Bank of Canada announced that it will maintain the key overnight rate at 1 percent for another little while (next announcement will be at the end of July). This means you have a little while longer with cheap(er) interest rates, but there were some really good commentaries in the announcement that I would really like to comment on:

While underlying inflation is relatively subdued, the Bank expects that high energy prices and changes in provincial indirect taxes will keep total CPI inflation above 3 per cent in the short term. Total CPI inflation is expected to converge with core inflation at 2 per cent by the middle of 2012 as excess supply in the economy is gradually absorbed, labour compensation growth stays modest, productivity recovers and inflation expectations remain well-anchored.

This has so many interesting little jabs in it:

  • It talks about high energy prices being a major cause of inflation, which is kind of obvious
  • Provincial indirect taxes being mentioned is interesting too. Taxes adding to inflation, sounds like something we should discuss with our Provincial MP’s? Ontario, you listening?
  • Labour compensation stays modest? Yes, they are saying you aren’t going to get a very good pay raise this year either (unless you are a CEO of course).
  • Excess supply in the economy is absorbed? Pardon? What do we have too much of, except for unemployed folks and debts? Not sure what this one is pointing at (I welcome your interpretations on that).

So many fun little tidbits in one paragraph, I love it, but the next paragraph is just as fun:

The possibility of greater momentum in household borrowing and spending in Canada represents an upside risk to inflation. On the other hand, the persistent strength of the Canadian dollar could create even greater headwinds for the Canadian economy, putting additional downward pressure on inflation through weaker-than-expected net exports and larger declines in import prices.

We are going to borrow more to keep up with inflation, but if we are lucky the Canadian dollar will stay strong and imported things will be cheaper, but then again if our jobs rely on exports, we might lose our jobs? Economics is really a fun subject where you get to argue both sides of an argument at the same time.

So, enjoy your cheap money for a little while longer. What was it like a year ago, well rates jumped 100% from 1/4% to 1/2%, so we are 100% higher than that now too, aren’t percentages fun to play with?

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