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To answer that question first we need to know why Bank of Canada is keeping the rates low. Looking at few news releases by the central bank – right after their interest rate decision announcement – will give us some idea. One thing will never be clear though – how much political interference is there.

The bank has kept the rates low for the following seeming reasons –

  1. Global economy is weak. There are no chances of improvement in clear sight.
  2. Canadian economy is weak.
  3. Many people are under massive debt load.
  4. Export is weak. Raising the rate will strengthen Canadian currency – that is not desirable.
  5. Inflation is lower than its target. Therefore it is not necessary for the bank to raise rates.
  6. Before raising rates the bank has pull its financial stimuluses’ out of the market.

What were the intensions of keeping the rates low:

  1. To provide businesses with access to low cost funds.
  2. To subdue the Canadian dollar exchange rate.
  3. To give enough time for household borrowers to control their debt level.
  4. To boost some household demand.

Did those work?

I am not an expert of global economy. I am barely able manage my household and business expenses. Therefore I can have my personal take (may be not so right) on the results.

  1. Household demand did increase. The policy helped people to borrow. So much that now some are at a verge of a financial collapse. Socially speaking – if all the people were responsible and wise then we did not need laws and regulations. So, people borrowed recklessly and the issue became not only a fiscal threat but also a political mess.
  2. The policy helped to bring long term yields down. Government is thinking about cutting pensions now. BoC repeatedly promised to keep rates low for a long time – thus killing any long-term yield expectations. Did it encourage short term profiteering? Looking at the spread between 1 year and 10 years mortgage rate we can learn a great deal about it.
  3. Global economy is weak but Canada cannot pull the globe. It is just a part of it. So, that cannot be a reason to keep rates low. May be it helped our exports a bit.
  4. Low rates drove the house prices up. Luckily the lender of last resort does not consider it as a factor in inflation.
  5. It poured money to help the banks in 2008. Did it ever have an exit plan? As far as we can see that it was all talk – no plan.
  6. The steps bank took were just following footsteps of other countries.

Now what?

Simply put – the rate should raise. There will be trouble and the bank should now prepare for it.

The real facto is that the bank may not be interested to raise rate till next election. The next federal election will be held in 2015. Therefore if the rate to raise then end of 2014 will be a good time to start it – a bit by bit.

Actually a recent Reuters poll suggested that the median forecast of 36 analysts was –  Bank of Canada rate hike in the third quarter of 2014.



Bank of Canada