The Bank of Canada held interest rates steady today. Going into the April 22 decision, I thought it was about time to stop the round of interest rates cuts, so I certainly agree with the decision.
But I was a bit surprised at the move. Since his arrival at the Bank in February, Mark Carney has cut rates more and faster than I would have thought prudent, and I hadn't yet seen any sign that he was going to stop. Before the announcement this morning, I was marshaling my arguments for a hissy fit on how the Bank of Canada's anti-inflation credibility was being shredded by a rookie central banker who didn't realise that his job was to control inflation, not provide cheap credit for Bay Street. I may yet throw that tantrum, but not today.
The move seems to have surprised the market as well:
Bank of Canada startles market with no rate cut: ... Economists and market players had widely been expecting a small rate cut of a quarter of a percentage point to stimulate the economy as it deals with recessionary conditions in the United States as well as tighter credit conditions.
Economists had also said that the central bank could quite easily justify a more aggressive rate cut to confront a slowdown in Canada, or swing the other way and freeze rates in the face of rising commodity prices. But they hadn't picked up any hints from the bank that anything other than a small rate cut was in store, and they assumed the central bank under Mr. Carney would continue the pattern set by his predecessors of preparing markets for a change in direction.
While it's true that it might have been a good idea to make some sort of signal to the effect that the Bank was not going to lower its overnight target, I have to wonder about the economists who thought that the Bank could "easily justify a more aggressive rate cut". The only economists on the CD Howe Monetary Policy Council who called for a rate cut are employed by banks; of the seven academics on the panel, four called for no change, and the other three called for a rate increase.
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