In perhaps the least surprising news of 2012, the Bank of Canada announced that it is leaving the target for the overnight rate at 1 per cent. Despite calls from the OECD to increase rates, the move is the correct one given the Bank’s mandate.
Year-over-year inflation has stayed relatively stable over the last two months, at 1.9 per cent in March and 2 per cent in April, right at the midpoint of the Bank’s inflation-control target. The BMO Capital Markets Economics forecast on June 1 has both the GDP price index and the CPI hovering between 1.7 and 2.3 per cent, well within the Bank’s 1- to 3-per-cent range.
Given the “sharp deterioration in global financial conditions” identified by the BoC, a rise in interest rates in 2012 would be unwarranted and I do not expect the Bank to make such a move.
With an unemployment rate of 7.2 per cent and some excess capacity remaining in the economy, an argument could be made for lowering the rate to accelerate economic growth. It would be a counterintuitive move (and one that would puzzle investors) given that -- outside of a blip in late 2011 -- unemployment has been steadily falling. As such, Mark Carney’s decision today was a wise one.
Mike Moffatt is an Assistant Professor in the Business, Economics and Public Policy (BEPP) group at the Richard Ivey School of Business – Western University. Mike also does private sector consulting for the chemical industry and can be found on Twitter at https://twitter.com/#!/MikePMoffatt.