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Surprise! 93% of market economist believe that BoC will keep interest rates unchanged next week

Not making this up, Canada's respectable Financial Post wrote an article that indicated that 93% of market economist "believed" that interest rates were going to remain at 1% next week when the board of the Bank of Canada meets. 

Part of the problem is that the article is about Canada's "economist" when the journalist really doesn't address the fundamental problem for Canada next week:  Weak 3rd quarter GDP numbers, with negative GDP growth in September, and very high producer price inflation.

What could have been interesting is th discuss the dilemma faced by the BoC; price stability is core to its mission (BoC is not independent from the Canadian government's policy -- as the latter can overrule the decision of the bank), and there are serious worries there.   Service inflation is substantially above the core target, and has been for some time, the core CPI is on the 2% threshold,  but CPI (including food & energy) is above that 2% target. It is widely assumed that there will be some feed trough of producer prices, and these are very high at more than 5.8%

The writer's only saving grace was to mention that the BoC would probably refrain from raising interest rate until early 2011 -- but then, it's more than obvious since that would coincide with the BoC's next board meeting.  the failure here is to make the readers believe that Canada's "market economist" have some kind of magic 8-ball available to tell them the actions the BoC will take. Sloppy journalism, on an important topic.  Although I guess that if you are uncomfortable with your subject -- interest rate policy, talking about what other people believe is the easiest.  

My take on interest rates:  The BoC is waiting period derived from the main economic indicators:  
  1. The BoC will be glad that industry is investing heavily in plant and equipment, and indication that Canadian companies are taking the CAD/USD parity issue seriously, and not as a temporary issue (should lead to improved productivity).
  2. Energy & food inflation are peripheral issue for the BoC, with a perception that we are nearly done, and that it will have limited impact on the economy (some of the increase in price will be absorbed by a stronger dollar -- which is deflationary)
  3. Housing is set for a correction, especially if the Asian slow down is for real -- this could provide the BoC's with some support (but this outcome is the opposite of higher energy price risk).
  4. Canada's economy is slowing much more quickly than the BoC had "anticipated" earlier this year.  However, most of this slow down has been caused by external factors (exports) over which Canada has no control.  The BoC's fear there will be that higher interest rate will put additional burden on Canada's economy (although everyone recognizes that current interest rates are very accommodative).
Certain of these factor cancel each other out.  But for Canada, as a very open economy, the BoC will be looking at external factors.  Should the much discussed Asian recession fail to materialize, then the BoC will consider raising rates by 25-50 bps over the next 6/9 months.  

Note that if U.S. interest remain at the current 0.25% and Canadian rates go above 1.25%, this would be the largest EVER interest rate differential between Canada and the US -- such differential has huge implications for Canada. 







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