Canada Central Bank Takes Different Tack on Interest Rates
The Bank of Canada distanced itself from its U.S. counterpart Tuesday, insisting that it still needed to raise interest rates even as the economy of its largest trading partner enjoys the lowest rates in a generation.
Senior Deputy Gov. Malcolm Knight, speaking less than a week after the U.S. Federal Reserve cut interest rates by half a percentage point, said the bank was watching both domestic and international factors as it weighed how best to trim credit availability in the fast-growing Canadian economy.
“In order to sustain noninflationary growth, we will need to continue to remove mon- etary stimulus,” Knight told the Canadian-American Business Council.
“The pace and extent of this action will depend on capacity and inflation pressures in Canada, and how these pressures are influenced by domestic and external developments.”
Speaking in Alberta, Bank of Canada Deputy Gov. Paul Jenkins also said the central bank may keep raising interest rates if Canada’s economy continues its red-hot pace and inflation pressures rise.
The bank said last month that it assumed core inflation would peak at 3% by year’s end and then subside to 2% in the second half of 2003.
The Bank of Canada has raised interest rates three times this year -- in April, June and July -- becoming the first of the Group of Seven industrialized nations’ central banks to increase rates since last year’s terrorist attacks.
Canada’s overnight lending rate is 2.75%, well above the comparable U.S. federal funds rate, which is 1.25%.
“The fact that our economies are quite integrated does not mean that we also need closely integrated monetary policies, or that Canada’s regime of inflation targeting and a flexible exchange rate is not needed,” Knight said in a speech on the Canadian economy in Washington.
Higher interest rates could strengthen the Canadian dollar, giving Canadians more purchasing power while making the country and its goods more expensive for Americans and other foreigners.
