Rates remain down (for now)

Our friends at the Bank of Canada Tuesday continued to keep interest rates down, but again the media is thinking that this may not last much longer.

I believe that the following paragraph would be the one that has the pundits buzzing:

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. In light of the reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the 2 per cent inflation target over the medium term. The timing and degree of any such withdrawal will be weighed carefully against domestic and global economic developments.

Interesting bit of baffle-gab, but I would interpret “… withdrawal of the present considerable monetary policy stimulus…” as saying that low interest rates may not be sustainable in the near future, especially if they are starting to worry about inflation (and they think the economy can withstand higher interest rates).

The one thing that may cause inflation to explode (or moderate for that matter) will be gasoline prices. They have remained high here in Ottawa (in Montreal gas is hovering around $1.50 a litre), and if these continue to go up, this may be the trigger to bring interest rates up as well. Why are gas prices so high? Couldn’t be price-fixing, since we know that isn’t going on in the industry.

Going back to Wednesday’s Stupid Mortgage commentary, wonder what happens to the housing industry with interest rates at double what they are now? Is that a bubble popping noise I hear, maybe not, but it would be a large bucket of cold water thrown on that hot topic.

Will interest rates explode? Well, it won’t take much for the Bank of Canada rate to double, to 2.0%, but how will the Big Banks reflect that change? All very interesting questions that will be replied to in the next few months.