Thursday, September 9, 2010

Third Consecutive Interest Rate Hike

Predictions Ring True! Third Consecutive Interest Rate Hike.

With the increase to 1 percent for the overnight rate, the Bank Rate is correspondingly 1.25 percent, and the deposit rate is .75 percent.

Financial conditions in Canada have tightened modestly since April, with the changing monetary policy measures, but overall still remains highly stimulative from a global perspective. This increase is consistent with the previously stated objective of achieving a 2 percent inflation target by next year. The global economy and Canadian economic indicators are what drove today’s decision to increase the rate. Canada’s economic recovery is expected to be more gradual that the July Monetary Policy Report had suggested, although the dynamics of inflation have remained fairly consistent.

The Bank of Canada’s second quarter projections were slightly more optimistic than how economic activity panned out, however consumption and investment has evolved in line with targeted expectations. Accomodative credit conditions due primarily to sharp declines in global bond yields in recent weeks support the expectation that consumption growth will remain solid and business investment in Canada will rise strongly.

The global recovery is still uneven, but is moving forward. Economically speaking, the recovery is showing stronger activity in emerging markets compared to some advanced markets. Latest indicators suggest a more subtle recovery in the short term for the U.S. as high unemployment rates hold back the recovery in private demand.

Any further reduction in monetary policy stimulus will need to be weighed carefully after three consecutive rate increases, considering the forward-looking uncertainty which is so rare to our national and global economic forecasting.
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