Op-Eds
The Bank of Canada announced on Wednesday that it was holding its overnight rate constant at 1.75 per cent. Although this was what the markets expected, it flies in the face of the general trend toward rate cuts by central banks around the world. It seems unlikely that the Bank of Canada can resist conforming to this trend for much longer, despite the overall strength of the Canadian economy.
Current conditions certainly seem to justify holding the line. Second-quarter economic growth was particularly strong, making up for weakness in the first quarter. It exceeded market expectations and the estimate of the Bank of Canada in its July Monetary Policy Report. Headline inflation in July was steady at 2 per cent. This was also…
Uncertainty dominates today’s policy landscape. Just last week it figured prominently and explicitly in the U.S. Federal Open Market Committee’s news release and press conference announcing its controversial interest rate cut.
Recognizing the nature and extent of the uncertainty facing us today is not hard. We have trade war uncertainty and associated uncertainty about the future of the global trading system, uncertainty about a changing world order, uncertainty about global governance and rules of the game, uncertainty related to technological disruptions, and climate change uncertainty.
But what exactly do we mean by uncertainty? How is it different from risk? And what does the rise in uncertainty mean from a monetary…
It has been a full decade since the last recession, which accompanied the 2008-09 financial crisis. The global and domestic economies are at a mature stage of the economic cycle, and numerous excesses are evident. Not surprisingly, there is a recurring buzz from international and a few domestic commentators on recession risk and who will be affected. Accurately predicting is tricky but there are plenty of reasons to be concerned.
Let’s consider two key questions on the next recession. First, what will cause it? A combination of negative factors occurring in close proximity will be the most likely cause. The next Canadian recession is unlikely to be because of slamming on the monetary brakes to defeat inflation, as arguably…
The Bank of Canada normally responds to the threat of a large recession by aggressively cutting interest rates. It won’t be able to use this strategy the next time around: short-term interest rates would hit zero before the job is done. Instead, the Bank will have to rely on large-scale purchases of long-term financial assets (quantitative easing) and a big depreciation of the Canadian exchange rate. While helpful, these policies are unlikely to be as effective as the Bank’s traditional strategy for fighting recessions.
The Bank’s benchmark-interest rate is now only 1.75 per cent, well below its level of 4.5 per cent on the eve of the 2007 financial crisis. Long-term interest rates are even lower. There is no reason to expect…
The Bank of Canada held its overnight rate constant at 1.75 per cent this week. Markets had completely priced this in, but nevertheless, there are reasons to be surprised by this decision, and perhaps even consider it a missed opportunity.
Let’s start with the state of the Canadian economy. Economic growth is rebounding in the second quarter after a sluggish first quarter. Some of this is because of temporary factors such as increased oil production. However, other factors, including the labour market, appear quite strong.
Average hourly earnings have grown in five consecutive months, peaking at a growth rate of 3.8 per cent in June. May unemployment fell to 5.4 per cent, the lowest rate since Canada began tracking…
