According to Mark Carney's speak yesterday, the Bank of Canada governor stated that the overnight rate might go up quicker and higher than first thought. This move would be to combat inflation. Here is the article from the Globe and Mail:
Mark Carney mindful of hotter inflation
Kevin Carmichael, The Globe and Mail
March 24, 2010
Bank of Canada Governor Mark Carney acknowledged Wednesday that inflation is running hotter than he had predicted, and emphasized the central bank's commitment to containing price increases, a combination of fact and nuance that increases the odds of an interest rate increase within the next few months.
The measure of inflation the central bank uses as a guide to where overall prices are headed touched 2.1 percent in February, a pace the Bank of Canada was not expecting until at least the second half of 2011.
"Core inflation has been slightly firmer than projected," Carney said in the text of his speech to the Ottawa Economics Association.
Some economists have dismissed the stronger core rate as the result of temporary factors, such as a surge in hotel costs related to the Vancouver Olympics. Carney agreed that some of the increase is the result of "transitory factors," but also said that a "higher level of economic activity" is also playing a role, suggesting policy makers are taking the jump in the core rate seriously.
Carney's musings about inflation are important because he and his senior advisers on the Governing Council are grappling with when to raise the central bank's benchmark overnight lending target from it current record low of 0.25 percent.
The decision is a delicate one, which explains why Carney avoided using his speech to draw conclusions about the economy based on recent indicators that suggest Canada's recovery is well entrenched. He said economic activity "has surprised slightly on the upside," yet "persistent strength" in the dollar and weak demand from the United States could yet impede the rebound.
A higher overnight target will cause consumer and business borrowing rates to rise and could put further upward pressure on the dollar, potential impediments to a recovery that most policy makers, including Carney, still consider fragile because it is reliant on heavy government spending and rock-bottom borrowing costs.
Almost a year ago, Carney dropped the overnight target to 0.25 percent and pledged to leave it there until at least the end of June of this year, provided there was no risk that the central bank would fail to fulfill its mandate of keeping annual inflation advancing at a pace of about 2 percent.
At the time, policy makers were struggling to stoke declining prices back to the target. Now, the greater risk appears to be overshooting 2 percent.
Carney emphasized that his commitment to keep the benchmark rate at 0.25 percent is "expressly" conditional on the outlook for inflation, a new phrase that will give pause to the many economists and investors that have based strategies and forecasts on the assumption that the Bank of Canada always intended on leaving borrowing costs unchanged until at least the end of the second quarter, if not longer.
The Bank of Canada will update its outlook for inflation in its next quarterly economic report, scheduled for release on April 22, Carney said. The central bank's next interest rate decisions are scheduled for April 20, June 1 and July 20.
"The Bank of Canada has an unwavering commitment to price stability," Carney said. "The single, most direct contribution that monetary policy can make to sound economic performance is to provide Canadians with confidence that their money will retain its purchasing power. That means keeping inflation low, stable and predictable."
