Bank of Canada keeps rate on hold again

May 30, 2007


The Bank of Canada has wisely decided to keep its overnight trend setting interest rate on hold at 4.25 % where it has sat for some time now.

This makes sense because the dollar is now trading above US 93 cents and would go higher if the Bank raised rates. Since inflation is still low at 2.5 % for core inflation and the CPI at 2.2 % there is no reason to raise the rates. But the Bank in its release (see below) suggests that it may have to raise rates in the future because of inflation running ahead of its 2 % target. This would be a very bad idea since unemployment is still above 6 % and there are signs of continued trouble in manufacturing because of the high dollar and the apparent failure of companies to invest in productivity enhancing plant and machinary.
A far better policy than raising interest rates would be for the Government and the Bank to target 5 % unemployment and seek to establish a new first stage equilibrium at that level of unemployment and low but not necessarily 2 % inflation.After all France has adopted this target rate of 5 % unemployment.

The high Canadian dollar would act as an inflation reducer and if the country adopted a more progressive environmentally sensitive policy in transportation that promoted greater fuel efficiency, better public transportation and also an anti-cartel policy of enhanced   domestic supply the policy cluster would be   definitely superior.

The Bank of Canada's statement follows.



Press Releases     2007FOR IMMEDIATE RELEASE
29 May 2007 CONTACT: Jeremy Harrison
613 782-8782  

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Bank of Canada keeps target for the overnight rate at 4 1/4 per cent
OTTAWA – The Bank of Canada today announced that it is maintaining its target for the overnight rate at 4 1/4 per cent. The operating band for the overnight rate is unchanged, and the Bank Rate remains at 4 1/2 per cent.

Information received since the April Monetary Policy Report (MPR) indicates that economic growth and inflation in Canada in the first part of this year have been stronger than the Bank was expecting. In April, both total CPI inflation, at 2.2 per cent, and core inflation, at 2.5 per cent, were above expectations. On the basis of available information, the Canadian economy is likely to have grown at an annual rate of about 3 1/2 per cent in the first quarter of this year - a full percentage point higher than was estimated in the MPR. The Bank now judges that there is somewhat greater excess demand in the economy than was thought to be the case in April. U.S. economic activity has come in largely as expected and continuing robust growth outside North America has maintained the global demand for, and high prices of, many commodities produced in Canada. Against this overall backdrop, the Canadian dollar has risen appreciably above the range assumed in the Bank's April projection.

On balance, the Bank judges that there is an increased risk that future inflation will persist above the 2 per cent inflation target and that some increase in the target for the overnight rate may be required in the near term to bring inflation back to the target.

An updated analysis of the Bank's outlook for growth and inflation, including economic and financial developments, trends, and risks, will be set out in the Monetary Policy Report Update, to be published on 12 July 2007.

Information note:
The Bank of Canada's next scheduled date for announcing the overnight rate target is 10 July 2007.
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