Bank of Canada raises interest rates again

June 10,2007

Despite been advised not to by Provincial premiers, major manufacturers and a few economists ,myself included, the Bank of Canada has once again stubbornly raised the overnight interest rate by 25 basis points to 4.5 % .

This will lead to higher rates on credit , house mortgages, reinforce the rising Canadian dollar and help prevent unemployment from dropping below six per cent. The decision is claimed to be justified because of mythical inflation in the economy running at 2.2 %.

But outside of Alberta and administrative tax increases and OPEC there is no inflation in the Canadian economy worth speaking of. It is simply a myth derived from the bad outdated   economic theory that the central bankers rely upon to assess trends in the economy.

Since the Fed did not raise its rates from their current level of 5.25 the smaller gap between the two rates will ensure further Canadian manufacturing slow down in Ontario and Québec and slower growth than need be.When I began this blog in early 2005 the bank's overnight rate was 2.5 %
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In fact, it began the year 2005 with the overnight rate at that level. Since then, beginning in September 2005 it has steadily increased the overnight rate by a full 2 % points. Unemployment which was 6.6 % in 2005 has fallen but only very slowly toward the 6.1 % level that it now sits at.By November 2006 it had already reached 6.2 %.

Since then, as the Bank continued with its tighter money policy and a rising Canadian dollar, the unemployment rate has only dropped one tenth of a percent.

If the bank had followed a different policy and not increased rates by 2 % points the unemployment rate would have been below 6 % by now and the economy that much more prosperous.

Its really time for a change in direction at the Bank.