Rates Remain the Same

To no ones surprise the key overnight rate from the Bank of Canada was kept at the ludicrously low rate of 0.25% today.

The reasons behind this decision are:

The dynamics of the recovery in Canada remain broadly consistent with the Bank’s medium-term outlook in its April Monetary Policy Report (MPR). Stimulative monetary and fiscal policies, improved financial conditions, firmer commodity prices, and a rebound in business and consumer confidence are spurring domestic demand growth. However, the higher Canadian dollar, as well as ongoing restructuring in key industrial sectors, is significantly moderating the pace of overall growth.

Some of the early strength in domestic demand represents a bringing forward of household expenditures, which modestly alters the profile of growth over the projection period relative to the April MPR. The Bank projects that the economy will contract by 2.3 per cent in 2009 and then grow by 3.0 per cent in 2010 and 3.5 per cent in 2011, reaching production capacity in the middle of 2011. Total CPI inflation declined to -0.3 per cent in June and should trough in the third quarter of this year before returning to the 2 per cent target in the second quarter of 2011 as aggregate supply and demand return to balance. Core inflation held up at 1.9 per cent in the second quarter of 2009. The Bank still expects core inflation to diminish in the second half of this year before gradually returning to 2 per cent in the second quarter of 2011.

OK guys, don’t give yourself whiplash patting yourselves on the back. Low rates have meant continued consumer spending, and yes inflation is low, but the fact the economy is going to shrink this year and allegedly will grow next year is hardly reason to celebrate. What happens with this recovery, inflation, maybe?

CPI Tachometer

CPI Tachometer

For those of you who have not checked out the Bank of Canada’s web site, they have some amazing graphics and this one is the one to look at if you are worried about interest rates. This shows that inflation in the eyes of the bank is very low and thus they are very unlikely to raise interest rates because of inflation (they may raise them for other reasons but it will not be for this exact reason). For those of you who keep asking me, “… will interest rates go up?”, watch this graphic.

Other Useful Graphs from the Bank of Canada

Interest Rates Via Step Graph

Overnight Rate Tach

I am a very visual learner and sometimes it really doesn’t strike me just how low interest rates have dropped over the past few years, so here is a very useful graph from the Bank of Canada illustrating the overnight rate since the beginning of this century, it is quite startling to see it has just gone down the whole time.