Kiyoko Fujimura

Buzzbuzzhome Corp.
April 19, 2010

Rates have been at record-low’s since the Bank of Canada lowered rates to 0.25% in April 2009. The rate decrease at that time was accompanied with a promise to maintain that rate until the latter half of 2010. However, the central bank incorporated one caveat to that promise: so long as inflation remained within a reasonable range.

And although economists predicted that inflation would only reach these levels by the second half of 2011, they were a bit too conservative in their growth estimates for the Canadian economy. Employment rates, GDP growth and, most importantly, inflation statistics have all come in higher than expected. In light of these numbers, economists are wondering if Mark Carney, the Governor of the Bank of Canada will invoke the caveat that he incorporated into his original promise.

The general consensus is that he will not. At least not yet. And the reason for maintaining rates is not to based on economic projections. The international investment community must feel as though promises from Canada’s central bank have some teeth. If Carney raised rates now, it would be difficult to depend on his word in the future. The Chief Economist at CIBC World Markets said:

We would urge the bank to stay with its conditional commitment to keep rates on hold through June…That delays the first hike by only six weeks, trivial in terms of the economic outcome a year or so hence but helpful if it ever again has to use such a declaration as a means of lowering one- or two-year yields. Financial Post

Most economists, then, have dismissed the possibility of a rate hike in the Bank of Canada’s report this Tuesday. The most important element of the report will be indications as to whether rates will begin to rise in June or July.

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