Kiyoko Fujimura

Buzzbuzzhome Corp.
June 1, 2010

We all knew it was coming. The Bank of Canada raised rates 25 basis points to a whopping 0.5% (the “whopping” is sarcastic, we’re still at historic lows). We’re now leading the charge in the developing world since our central bank is the first to raise its rates in the G7. It’s also the first increase since 2007.

With the housing bubble and current rates of inflation it may seem like raising rates was a no-brainer– but it’s not. It’s a real brainer. Here are some of the considerations Mark Carney, the Governor of the Bank of Canada, had to consider in his decision.
  1. Inflation Target: First and foremost, the Bank of Canada looks at its inflation target of 1-3%. Raising rates will slow inflation and lowering them will increase it (because people will buy more if rates are lower which will raise prices). Inflation has nearly hit the Bank’s target of 2%. This was likely the ultimate deciding factor for today’s rate hike.
  2. The housing bubble: Carney surely wasn’t ignoring the massive price increases in the housing market due primarily to low interest rates. If rates remained low, Canadians and international investors would keep buying homes and pushing up prices.
  3. General growth of the Canadian economy: Just yesterday, there were better-than-expected GDP growth numbers released which also supports Carney’s decision to raise rates.
  4. International growth: Canada’s doing really well, but other countries (namely the US) hasn’t managed to pull itself out of the hole quite yet. Since we’re so dependent on international markets, Carney has to keep a close eye on whether higher rates will harm Canadian competitiveness.
  5. The introduction of the HST: while this factor likely won’t be particularly important until further rate hikes are considered, it definitely had some impact on Carney’s decision to leave his game plan for the next few months open to interpretation.
Economists are saying that the Bank of Canada was vague about its plan for future rate increases.

In the end, there is absolutely no upside in the [Bank of Canada] committing to a path of rate increases going forward – even though a series of 25 [basis point] increases over the remainder of the year still seems the most appropriate outcome. The Financial Post

Basically, the central bank doesn’t want to indicate one way or the other whether rates will increase further in the coming months. They have a lot to keep an eye on in the coming months.

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