Money too Loose Continues

Born too Loose

I saw that as a tattoo once on a young lady and asked what it meant, and she said, “You know, I am a rebel, so I am not going to succeed in society, so I was Born to Lose.”  I smiled, had a careful re-check of the tattoo and complimented her on her choice of phrases, but that has nothing to do with the Bank of Canada’s interest rate decision yesterday.

Loose Money

Yes, the Bank’s monetary policy continues on its Loose Money ways, that is for sure, with the Bank keeping its key overnight rate at 1.0% and thus it’s Bank Rate is at 1.25%, and its savings rate is at 0.75%, same as it has been for a while, which is a relief for those who are carrying debt right now.

To quote the report that came with this announcement:

The recovery in Canada is proceeding at a moderate pace, although economic activity in the second half of 2010 appears slightly weaker than the Bank projected in its October Monetary Policy Report. In the third quarter, household spending was stronger than the Bank had anticipated and growth in business investment was robust. However, net exports were weaker than projected and continued to exert a significant drag on growth. This underlines a previously-identified risk that a combination of disappointing productivity performance and persistent strength in the Canadian dollar could dampen the expected recovery of net exports.

In other words, we are afraid to raise interest rates just yet because the North American economy in general and Canada’s economy in specific is far too fragile to absorb a tighter monetary policy (for now). The report goes on to say that in “…broad terms…” inflation is in line with the Bank’s views (an interesting term to use, it sounds like they are hedging their bets).

A more exciting comment was:

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. This leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in an environment of significant excess supply in Canada. Any further reduction in monetary policy stimulus would need to be carefully considered.

Again, they seem to be saying things are a little too fragile for any kind of monetary tightening, so we need to keep money loose for now.

How good have we had it? Please look at the graph and see how low the rate has been for the past ten years. Remember that interest rates were at the 20% level in the ’80s, and don’t say that can’t happen again, because it can.