Interest Rate in Canada for the Third Time

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Interest rate trend in 2010 is definitely a hot economic topic in Canada and real estate market professionals are among the very first ones to be interested. I will serve you one more opinion - this time a bit alternative one.

We have offered you two articles recently, both suggesting that interest rate will hike and that the 'Thaw is coming'. This time I have one completely different opinion for you from David Rosenberg, chief strategist for Gluskin Sheff + Associates Inc. and a guest columnist for Report on Business. In contrast to most of his colleagues, he believes the interest rate will remain steady in 2010.

In fact, my view is that the Bank of Canada will not be raising rates until mid-2011 - at the earliest.

His main argument is based on the analysis of the historic sequence of actions conducted by the Banks of Canada in times of a recession. Rate growth used to be initiated a quarter before the gap (difference between actual and potential output of the national economy) was closed. However, the gap is still around 1.55% today, narrowing down to 0.25% probably soonest in the mid 2011.

Similarly, the unemployment rate should drop around 150 basis points (1.5%) from the peak level (which was in August 2009, when unemployment hit 8.7%) – no need to say we are quite far from this expected level.

David Rosenberg adds to his argumentation also the fact that there is more deflationary rather than inflationary pressure in the economy, there are constraints caused by strong Canadian dollar and weak demand from the USA. Consider also the BoC rhetoric of "fragile recovery sustained by monetary and fiscal stimulus" and the logical result is clear – no interest rate hike will take place in Canada this year.

Rosenberg offers interesting arguments; however some of them were challenged in the already mentioned Bank of Canada governor's speech. Especially the unemployment seems a bit tricky topic for a deep analysis. Massive labour hoarding, observed during this recession, was an obstacle for rapid unemployment growth, but also is causing the unemployment to disappear more slowly. So using historical unemployment trend as one of the main arguments may lead to wrong conclusions.

Original article here.

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