Low rates look safe for a while: "There are arguments that this country needs an extended period of credit coddling."

The Gazette - October 20, 2009 -  With Canada's economy looking perkier than expected and Australia's central bank having sprung the world's first rate-hike surprise two weeks ago, murmurings have arisen that the Bank of Canada could tiptoe a bit closer to a rate increase of its own today.

Not likely.

It's true that Canada is emerging as one of the strongest economies among wealthy industrial nations, which means it could theoretically be compared to Australia, since any sustained strength could suggest a need to rein in the ultra-low interest rates promised by the Bank of Canada for most of the coming year.

But it also is true for each sign of strength - rising resource prices, surprisingly resilient job growth, booming housing sales - there are countervailing arguments that this country needs an extended period of credit coddling.

Indeed, it's hard to find anybody that seriously thinks there's a chance of an actual rate hike from the ultra-low 0.25 per cent rate that our central bank has promised to maintain - short of an unexpected inflation problem - through June 2010.

Any hint of tightening, then, would come in the wording of the Bank of Canada's statement renewing this commitment.

If the commitment looked a little less solid than in past statements, it would be taken as a sign that monetary policy - which can take a year or more to have much impact on the real economy - might be tightened earlier than expected, or at least that rates would be hiked faster than expected once the central bank's promise expires.

Some are betting on this already, with the interest rates on longer-term lending drifting up in recent weeks, reflected in a rise of one-quarter of a percentage point or more in the rate on a five-year bond or mortgage.

The bond-market bets that produced this increase could well prove to be good ones if Canada's economic recovery proves to have legs.

 

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Marlene Ofter

Marlene Ofter

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