Interest Rate Hike

This morning, the Bank of Canada raised its interest-rate target from 0.25% to 0.5%. Yesterday’s robust GDP numbers had the overwhelming majority of economic pundits arguing that it should and would do so.

But just one week ago, when the stock market was plummeting due to the Euro crisis, most commentators and headlines suggested that the Bank of Canada might have to hold off on hiking rates. Before that, the consensus was that it ought to raise them. So, the conventional wisdom on interest rates made two 180-degree turns in two weeks.

I can claim consistency in arguing against today’s increase. Today’s Toronto Star (page B1) features my “case against” opposite Doug Porter’s “case in favour.” Canadian Press also has me as the lonely opposition.

While I still believe that the rate hike is premature, the accompanying statement actually made a couple of encouraging comments. The Bank of Canada signalled that it will not be too aggressive in raising rates again: “any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.”

The Bank also noted that the GDP growth reported yesterday had been “led by housing and consumer spending. . . . The anticipated pickup in business investment will be important for a more balanced recovery.” (I added the italics because I think the Bank’s wording correctly points out that business investment has not yet picked up.)