Overnight rate on hold until economic data improves

Overnight rate on hold until economic data improves

Overnight rate on hold until economic data improves The governor of the Bank of Canada, Stephen Poloz, suggested Tuesday that the overnight interest rate may soon be raised and he welcomes a strengthening American economy as one of the catalysts for such a maneuver.

“If the U.S. economy is strengthening as we believe, those will be very welcome kinds of market pressures but it’ll still be up to us what our monitored policy should be, independently of what’s going on in the U.S. and that will depend on where is inflation relative to where we expect it to be,” Poloz said on CBC’s the Lang and O’Leary Exchange. “Right now it’s expected to be too low for too long so that’s where we sit.”

The remark comes on the heels of Finance Minister Jim Flaherty’s comments about international pressures for Canada to raise its overnight rate.

“The OECD and the IMF have both said to Canada we ought to let our interest rates go up a little bit,” Flaherty said on CTV’s The Question Period on Sunday. “So there will be some pressure there to let that happen.”

And it’s a comment Poloz doesn’t necessarily agree with.

“No, I wouldn’t use the term ‘pressure’ but … in the context of a firming global economy, especially the U.S. we would expect to see some upward pressure in market interest rates, long-term rates in particular which, of course, are where the quantitative easing has a primary effect,” Poloz said. “So as the tapering occurs we might expect to see as we saw in the summer some increases in long-term rates.”

However, Poloz expects the economy to experience a soft market, which indicates that holding off on hiking rates is the diligent move for the time being.

“We believe that the consumer is going to be fine and we’ll have a soft landing but, of course, that assumes there are no major shocks,” Poloz said. “So you always wonder if the next shock will be the thing that causes unemployement to rise like we saw five years ago and that setting it would be quite difficult to navigate with this level of indebtedness.

“That tells us that we should be holding rates where they are until the data flow changes our mind.”