Loose Money Continued in 2011
The Bank of Canada announced on March 1, 2011 that their Key Overnight Rate would stay at 1%. It did not sound like a rate increase was likely any time soon.
The recovery in Canada is proceeding slightly faster than expected, and there is more evidence of the anticipated rebalancing of demand. While consumption growth remains strong, there are signs that household spending is moving more in line with the growth in household incomes. Business investment continues to expand rapidly as companies take advantage of stimulative financial conditions and respond to competitive imperatives. There is early evidence of a recovery in net exports, supported by stronger U.S. activity and global demand for commodities. However, the export sector continues to face considerable challenges from the cumulative effects of the persistent strength in the Canadian dollar and Canada’s poor relative productivity performance.
Our economy was heavily dependent on exports and energy. Fortunately, it was performing well. This was despite the global energy crisis. However, we acknowledged that the sudden boom in oil sales may not have been sufficient. It did not counteract the drop in purchases from our largest trading partner, the United States. It was crucial that China increased their purchases from us. If not, we needed to hope for a rapid recovery in the US economy. Otherwise, Canadian businesses would continue to suffer in the long run.
Inflation, you may ask? Well, here was the standard statement on March 1, 2011 from the Bank:
While global inflationary pressures are rising, inflation in Canada has been consistent with the Bank's expectations. Underlying pressures affecting prices remain subdued, reflecting the considerable slack in the economy.
The Bank has taken all of these factors into account. As a result, it 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.
So they said that Inflation was here, but it was still at acceptable levels. Gas prices were rising. This rise had a domino effect on the rest of the economy. Therefore, they reserved the right to jump in with a quick rate increase. They might have done this to choke off the money supply if they need to. But that was not likely for a while.
The predictions were of a slow increase back to normal levels for interest rates. However, when is anything in the economy these days anything like normal?
Thank you!!! I’m so excited about this! 🙂