A few short months ago the common wisdom among investment practitioners was that the Bank of Canada would start to raise interest rates again, following the rate increases from the European Central Bank (ECB) the Bank of Australia. Since then the United States economy has stalled and the financial markets have been in turmoil, primarily over the growing concern over the funding of European (Greece, Italy, Spain and Portugal) sovereign debt. The talk has turned to recession in developed nations such as Japan, parts of continental Europe and the United States.
The Bank of Canada’s announcement yesterday of no change in interest rates is the most gloomy since the recession officially ended in 2009. Although most of the economic shocks that have occurred since the last Bank of Canada policy meeting in mid-July have come from outside of Canada, it still has had an impact on the Canadian economy. Look no further than the negative balance of trade statistics and the decline in the Canadian dollar from a recent high of $1.06 to under $1.02. The second quarter actually saw the Canadian economy shrink by 0.4 per cent. Bank of Canada Governor Mark Carney announced yesterday morning that his year-long pause in interest rate increases will now last much longer as a bleaker outlook for the global economy quashes any urgency to make it more costly to borrow and spend. Mr. Carney painted a troubling picture for the United States and Europe, and said exports will be a “major source of weakness.” The Bank’s trend setting policy interest rate will remain at one percent for now, but the probability is rising very fast that we will see as much as a 50 basis point cut (1/2 of one percent) in interest rates later this fall or early in 2012.
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