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Canadian Interest rates

This is an easy one, tomorrow (Tuesday) the Bank of Canada will announce that interest rate remain unchanged, and will remain at 1%.  The BIG question tomorrow is for how long they will stay there?  It is generally assumed that the rates will stay where they are until March  2011, but after that there is a wide range of opinions -- all they way from a possible cut in interest rates -- because Canada's economy is slowing, to the idea that rates could be as high as  2.25% by the end of 2011.

Personally, I have no opinion, frankly there are too many external  factors at play here (decision over which Canada's main actors have no input -- are price takers).  First, commodity prices (Copper, Oil and Gas etc) are high and rising, that has an immediate impact on the Canadian economy -- since so may of our exports are raw material (or at the very least lightly processed).

Our giant next door is another issue, there is a growing possibility that the congress will not agree to the extension of the Bush Tax cuts -- its improbable, but not impossible. If the tax cuts are not renewed the impact on the US economy could be important (however, the extension would also mark the U.S. as one of the countries with the highest deficit  - as a percentage of GDP).

If the "emerging" economies are indeed slowing, weak global growth translates into a drop in energy prices, which means higher "imported" inflation for Canada (lower CAD will add to inflation )....

That most market economists disagree as to where rates are going speaks volume as to the perceived direction of Canada's economy.  They key facts are as follows: (1) The economy is weaker than the BoC wants, (2) Canadian dollar is stronger than it should (3) inflation is higher than desired, and (4) housing will depress GDP growth over the next 18-24 months -- a result of an overbuild during the 2008-2009 period.

Anyway, it matter not so much, the 2 year swap is still assuming a yield of 1.63% down from 1.75% a few weeks ago.  The long end (30 year) has hardly moved -- so expectation are only on the shorter end
  









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