BOC Eases off on the Throttle

Dan Sumner, Economist, ATB Financial
September 8, 2010
Despite a clear cooling in the Canadian economy recently, and rather dreary news emanating from our major trading partners, the Bank of Canada (BOC) announced this morning that it’s using its powers to push Canadian short-term interest rates slightly higher.
The BOC lifted the overnight interest rate by 25 basis points to 1.0%. Due to the recent economic uncertainty, and particularly the consistently poor economic picture in the US, economists and markets had been divided on whether the central bank would raise the rate today or not.
It may seem strange that the BOC would raise rates at a time when the Canadian and global economies appear to be slowing down, but as the BOC noted in its press release, at 1.0% the Canadian overnight interest rate remains extremely stimulative. In response to the 2008/09 recession, the central bank cut rates to emergency levels, and while the outlook for the Canadian economy is still rather uncertain, it is not in an emergency situation any more.
The overnight rate is the interest rate that Canadian banks use to lend money to each other in the overnight market and this rate in turn affects interest rates for consumers on products such as a variable rate mortgages. As these rates rise, consumers are expected to spend less and businesses are expected invest less.
Although the BOC did not provide any specific guidance about where it expects interest rates to go from here, it did note in its press releases that economic activity in Canada has been softer than expected and that the outlook for the economy has deteriorated slightly. Looking ahead, while interest rates are still expected to rise slowly, there is a chance the BOC could go on hold until the global economy shows stronger signs of life.