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Bank Of Canada Leaves Rate At 1%

James Boston
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The Bank of Canada (BoC) surprised nobody today by leaving the country’s key interest rate unchanged at 1.0%, a level at which it has been since September of 2010.

The Canadian economy, which has for much of this year been one of the star G7 performers, has taken a series of knock backs over the past few months. An unexpected uptick in unemployment last month combined with softer than anticipated manufacturing data has indicated that a certain cooling is taking place. This is likely to reaffirm the BoC change of stance, which was switched to neutral last year from a more hawkish stand point coming into the year, currently in the absence of forward guidance it would have to be assumed that the Bank would be slightly on the dovish site.

One aspect that is perhaps contributing to the maintenance of the neutral BoC monetary policy position is the overheating that is clearly evident in the Canadian housing market. The Bank along with federal housing agencies have been attempting to dampen this market bubble through the use of regulatory and lending rules changes, these macroprudential approaches however have so far delivered a very limited result and the housing market continues to be one of the key risks to the Canadian economy. In the absence of critical problems elsewhere in the economy there is little chance that the BoC would risk further fuelling a runaway property market through monetary easing.

Canada needs to force a soft landing in the housing sector, where new employment has been created in the economy much of it has been in the area of construction and these are jobs that Canadians cannot afford to loose in light of the other softness in the employment market. A gradual cooling in housing construction combined with investment in infrastructural projects would appear to be a logical approach to this situation.

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