The Bank of Canada (BoC) released its latest decision on interest rates today, keeping the benchmark overnight rate at 1% . Â Even by the criteria that Mark Carney is supposed to follow, the logic of this is hard to fathom. Canada’s economy is growing Â close to 3% on an annual basis, which is well within the range the central bank views as optimal. Â At the same time, inflation, at least insofar as that’s measured by the Consumer Price Index, is running above the 2% target (at 3.7% Â to be exact) set by Canada’s central bank. Â Core inflation, which is supposed to measure the prices of goods less subject to temporary gyrations, is also above the threshold that the central bank has established.
There was some hope in the BoC’s statement that it is at least glimpsing the fact that it is running a very, very easy money policy. In the last paragraph, it wrote:
To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be withdrawn, consistent with achieving the 2 per cent inflation target.
Financial markets took this as a sign that Mr. Carney will finally be raising rates at the next BoC meeting.
By then, Â however, Â it will have already been too late and Canada’s central bank will have to contend with a real estate boom that its policies have fostered. Â Perhaps I am seeing things, but this chartÂ of Canadian residential prices is reminiscent of the Nasdaq Composite Index in the 1990′s.