Interest Rates

There is currently a general trend around the world to raise interest rates to moderate inflationary pressures. In Canada, the most recent hike occured on July 10, 2007 with a 1/4 point raise to 4.5%. The Bank of Canada attributed its policy to raise as a direct result of stronger than expected economic and inflationary growth in the April Monetary Policy Report (MPR). Statements from the Bank of Canada have highlighed Final domestic demand and firm commodity prices as the key drivers of economic growth and their sentiment suggests that this trend will continue. The bank sets a target inflation of 1-3% and both total CPI and core inflation were above this; further, longer-term interest rates have increased resulting in a significant appreciation of the Canadian dollar.

Looking forward, the Canadian economy is projected to grow by 2.5% in 2007, and slightly slower through 2008 and 2009. New projections from the Bank's website predict higher interest rates, and a higher Canadian dollar (93 to 95.5 cents U.S.) as moderators of growth through 2008 and 2009, leading to an estimated growth of 2.5% through each year. The Bank also made statements suggesting inflation would remain stronger until early 2009 where it is expected to decline to 2%.

The result of these projections is that the Bank of Canada is now subject to both upside and downside risks with regard to inflation expectations:

Upside Risk--stronger house hold demand in Canada
Downside Risk--higher Canadian dollar, and ongoing adjustment in U.S. Housing market

The next scheduled interest rate announcement is September 5, 2007.

For more information about the Bank of Canada visit their website:

http://www.bank-banque-canada.ca/en/index.html