Maybe the Bank of Canada won't raise interest rates on June 1

The April CPI release is out; here is the updated graph of core inflation rates over various horizons:

Core inflation started trending above the 2% target in November, and this trend explains why the Bank felt it necessary to use its April 20 interest rate decision to release itself from the conditional commitment to hold the overnight target at 0.25% until July.

But since then, two things have happened:

• The eurozone crisis has rattled financial markets.
• Inflation has slowed.

On April 20, there was a pretty strong argument for increasing interest rates on June 1. That case is looking much weaker now.

Comments

[Mark]

At a recent OTR meeting, there was an interesting exchange between a Bank official and some modellers (I won't say who!). The economists pointed out that the UR is significantly above any definition of NAIRU, there is significant underinvestment and internationally there will be more disinflation than inflation.

The Bank official replied that much of the strength in CPI is due to regulated prices and that the output gap is very likely much smaller than anyone (even the BoC's own official estimate) expects. There were also very subtle intonation that the Bank is suspicious of other forecasters model results and that there is a clear bias that people have to keep interest rates low.

I left with the distinct impression the Bank is on a 2003ish trajectory to raise rates, no matter what reality would suggest. The hopeful economist in me hopes they keep rates unchanged but the realist in me expects at least 3 hikes before they do a 'uh oh what have we done?' Dodge-style backup. Look at their 1.9% rgdp forecast for 2012.

[westslope]

I disagree. I do not believe the Bank of Canada should put much weight on stock market gyrations.

The looming end-of-the world crisis of late 2008 is over.

A 0.5% or 0.75% overnight rate is more than sufficiently low. Real overnight rates would still be negative.

[asp]

Why stop at 12 months on the chart? What do things look like if we look at 18 months, or 24 months?

[Paul Friesen]

Sure hope they don't raise rates too soon. A little inflation won't hurt much. Better than being like Japan.