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Bank of Canada and Interest Rates Essay

The Bank of Canada has indicated that it has concerns over inflation being too low. (Parkinson). However, inflation has been rising and the Canadian economy has strengthened over the last several months. Keeping interest rates too low over a long period of time may have a tendency to over-inflate the economy and create asset bubbles while also creating pockets of greater debt, not dissimilar to those that contributed to the global economic collapse of 2008-2009.

Although the Bank of Canada has iterated – and reiterated – its current neutrality with respect to interest rates, economists predict that current conditions may require the bank to move more quickly than it may like to bump the rates in the next several months. (Parkinson). Canada is currently facing a housing bubble like that which occurred in the United States, prior to the massive global downturn of 2008-2009. (Altstedter). Home prices have been steadily increasing along with the size of the debt that homeowners are taking on in order to afford the increase in housing prices.

Earlier this year, the Bank’s governor, Stephen Poloz, had forward guidance language that cautioned that interest rate hikes could be in the offing removed from Bank of Canada’s policy statements. (Kawa). Since the removal of the language, inflation has begun to increase and the Canadian Dollar has weakened somewhat. This will contribute to further expansion of the housing bubble in Canada. In order to slow the growth of the housing bubble and prevent or delay its eventual bursting, the Bank of Canada will likely be forced to raise interest rates.

Bank of Canada Will Not Alter Interest Rates

One of the reasons Bank of Canada’s Governor Stephen Poloz removed forward guidance warning of the potential need to increase interest rates from the Bank’s policy statements was to highlight the neutral stance he and the Bank are embracing with respect to interest rates. (Kawa). Poloz said in a September statement that he feels that the global economy is “performing largely as expected” and that the housing industry in Canada was “stronger than anticipated.” (Isfield). This month, Poloz stated that he feels that the upside and downside inflationary risks are, at this time, balanced and that, as such, there is no need alter interest rates in the foreseeable future assuming the status quo is not disrupted. (Parkinson).

The Bank’s current neutral stance on interest rates, has now been reiterated and strengthened, to such an extent that it is possible, to “ultra-neutral.” (Isfeld). Because of Poloz’s ongoing statements with respect to interest rate neutrality, the bank’s removal of interest rate hike guidance from its policy statements, and the perception that the risks between and inflationary upside and an inflationary downside are perceived by Poloz and the board to be balanced, it is unlikely that interest rates will be changed in the next six to twelve months by the Bank of Canada.

Works Cited

Altstedter, Ari. “Housing Bubble Will Force Bank of Canada to Renew Rate Hike Warnings Soon, Pimco Says.” Financial Post. 1 Oct. 2014. Web. < http://business.financialpost.com/2014/10/01/housing-bubble-will-force-bank-of-canada-to-renew-rate-hike-warnings-soon-pimco-says/> Isfeld, Gordon. “Bank of Canada’s Stephen Poloz Turns Ultra-Neutral On Interest Rates.” Financial Post. 3 Sep. 2014. Web. Kawa, Lucas. “Say Goodbye To Forward Guidance From The Bank Of Canada.” Business In Canada. 14 Oct. 2014. Web. Parkinson, David. “Bank of Canada Still Fears Low Inflation Despite Balanced Outlook.” The Globe And Mail. 3 Nov. 2014. Web.

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