Bank of Canada keeps rate on hold

Citing data that shows the Canadian economy slowing down more than they expected the Bank of Canada has decided, probably unwisely, not to cut its key overnight interest rate for another month. When one examines the inflation data stripped to its core excluding volatile items over which we have no control like the price of energy (since we have made a policy choice to follow world prices despite our substantial supplies of petroleum and natural gas)we can see that inflation is running at just over 1.4 % for the past two years.
CPI excluding food, energy & the effect of the changes in direct taxes   2004 Q4(fourth quarter 2004) 1.1 %
2005 Q1 1.4 %;   2005 Q2 1.2%;   2005 Q31.2; 2005 Q4 1.4 %;
2006 Q1   1.4;   2006 Q2   1.6   Aug. 1.9 %.(Source: The Bank of Canada)


This is clearly a non inflationary environment. If we factor in the slowing down of growth in the US, the growing slowdown in housing, soft wood lumber exports and the recent decision of the European central bank to hike interest rates it would seem a very prudent bet to presume much slower growth in the next few quarters, despite the energy boom in Alberta. Incidentally the difference between the economy of the west affected positively by alberta's energy boom and that of the manufacturing and exporting dependent east in southern Ontario and western Quebec is going to be a big problem for a national interest rate policy.

Even if the the long term Kondratieff wave(a controversial proposition in itself) is now positive which it may be we still are at risk of a shallow global recession at least in the western G7 countries, Canada included.

But Mr.Dodge and his governing committee seem determined to hang on to their expectations monetarist approach which hangs its hat on the natural rate of unemployment doctrine and presumes once national unemployment drops below 7 % inflationary expectations are automatic. We are going to see if in the next several months such a decision to keep the bank rate at 4.25 % a full 3 % points above the rate of inflation ensuring bank loans, mortgages and credit card rates considerably above that level on average is a wise one.

I would have opted for a rate cut say by 25 or 50 basis points to signal that the risk was greater now than the inflation risk and then watched the impact.

Those of us in Quebec where unemployment is currently 8 % and job hunting for those unlucky enough to be out of work quite difficult see the world differently from those sheltered in Ottawa. But time and events may eventually open some eyes.