Bank of Canada Holds 1% Overnight Rate Steady

Despite total CPI inflation up 3.7% in the 12 month period ending in May (the largest increase since March, 2003), the BOC held its overnight interest rate at 1%. This announcement made on July 19^th was largely expected as the Canadian economy had slowed in the second quarter. The bank expects it to pick up during the latter half of the year and to see inflation head toward the target 2% rate by the middle of 2012. This suggests that there may be an interest rate hike before the end of this year. In the short term it is expected that inflation will continue in the 3%+ range.

The Bank made the interest rate call on the assumption that the sovereign debt crisis in Europe will be resolved in an orderly manner. Slow growth and debt issues in the US could cause problems with economic projections as well. The next interest rate announcement by the Bank of Canada is due on September 7, 2011.

Not everyone agrees with the decision to maintain the status quo. The CD Howe Institute's Monetary Policy Council was hoping that the overnight rate would be raised to 1.25%. This is a group of Canadian financial-market and monetary economists who provide an independent assessment of monetary policy. The consensus of the group is that the overnight rate should rise to 2.25% by July 2012. Although they agree with the Bank of Canada that higher interest rates ahead of any U.S. upward moves would hamper domestic growth, global inflationary pressures are of concern as well. They would like to see a modest increase in 2011 as the risks of European and U.S. debt concerns are made clear. If all goes well, more aggressive rate hikes would occur in 2012.

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