Still At 1%

The Bank of Canada (BoC) released its latest decision on interest rates today, keeping the benchmark overnight rate at 1% .  Even by the criteria that Mark Carney is supposed to follow, the logic of this is hard to fathom. Canada’s economy is growing  close to 3% on an annual basis, which is well within the range the central bank views as optimal.  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%  to be exact) set by Canada’s central bank.  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in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be withdrawn, consistent with achieving the 2 per cent inflation target.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,  however,  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.  Perhaps I am seeing things, but this chart of Canadian residential prices is reminiscent of the Nasdaq Composite Index in the 1990′s.

3 Responses to “Still At 1%”

  1. lemoutongris says:

    yet another reason to invest in gold. Other placements aren't worth anything

  2. mstob says:

    Here is a nice chart regarding Canadian house prices that I stumbled on some weeks ago.

  3. Another real estate boom/bubble is possible with borrowing rates this low; but they also allow people to pay off existing bank loans quicker, before the inevitable rate hikes become painful. No doubt, as is historical, that some people will get into more expensive homes not thinking about future rate hikes and what they translate into: higher monthly payments. Others will use this time and rate to pay down/off current debts.

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