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Where do you start? First, I was wrong!

Clearly the Bank of Canada saw an opportunity by raising rates by 0.25% this morning.  The press release seem do indicated that this rise should be viewed in the context of global financial turmoil and this may not presage an aggressive strategy of raising rates going forward.  But of course what else were they going to say within the context of an

The question that needs to be asked is why?

The BoC gives a few reasons:

  • The Bank has decided to raise the target for the overnight rate to 1/2 per cent and to re-establish the normal functioning of the overnight market.
  • Activity in Canada is unfolding largely as expected 
  • The economy grew by a robust 6.1 per cent in the first quarter, led by housing and consumer spending. Employment growth has resumed.
  • Going forward, household spending is expected to decelerate to a pace more consistent with income growth. 
  • The anticipated pickup in business investment will be important for a more balanced recovery.
  • CPI inflation has been in line with the Bank’s April projections. The outlook for inflation reflects the combined influences of strong domestic demand, slowing wage growth, and overall excess supply.
  • This decision still leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in light of the significant excess supply in Canada, the strength of domestic spending, and the uneven global recovery
There you have it I was wrong.  The BoC took this opportunity to raise rates, because it could.  The economy is far from strong, inflation is under control and global events (which affect a trading nation such as Canada) are volatile.

As David Rosenberg said yesterday, interest rate hikes are like potato chips – you never have just one!

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