Interest Rates Up as Canada’s Economy Roars Back

Canada survived the economic crisis relatively well, but the outlook is still hazy due to global economic uncertainty.
Interest Rates Up as Canada’s Economy Roars Back
6/3/2010
Updated:
6/5/2010
TORONTO—Canada has made it through the economic crisis relatively unscathed compared to other leading industrialized nations but the outlook is still hazy because of an uncertain global economy, says the Bank of Canada.

On Tuesday, surging economic growth forced the central bank to raise interest rates by a quarter of a percent—the first country of the Group of Seven leading industrialized nations to do so since the global financial crisis struck in 2008. The overnight rate now sits as 0.5 percent.

This came on the heels of a Statistics Canada announcement the day before that the economy had outpaced positive expectations, with gross domestic product up by 1.5 percent—or an annualized rate of 6.1 percent—over the January to March quarter.

It’s the biggest jump since 1999 and a third of a percent better than what economists were expecting. It is also double the rate in the United States, where foreclosures continue to batter the housing market and unemployment sits at 10 percent after April’s jobless rate showed a grimmer situation than a year before. More than a dozen areas, 11 of them in California, posted unemployment rates of 15 percent.

Consumer and government spending were leading factors in Canada’s improving situation along with housing demand which increased 5.4 percent for the quarter. Housing has been in an upswing for a year now and mortgage borrowing saw a sharp rise in the quarter, but has been rising for the past year as well.

While the immediate future looks bright domestically, Canada’s export-based economy is highly vulnerable to instability in foreign markets. Challenges in Europe and the United States have muddied the waters, leaving Bank of Canada Governor Mark Carney making vague statements about the possibility of future rate hikes.

While the head of Canada’s central bank lent stability to the investors by promising the record-low interest rate would remain when the global downturn first struck, now he has taken the opposite tack and saying that despite Canada’s GDP growth, uncertain global recovery makes it impossible to project whether future rate hikes are likely.

“In most advanced economies, the recovery remains heavily dependent on monetary and fiscal stimulus,” said a statement from the central bank.

“The global economic recovery is proceeding but is increasingly uneven across countries, with strong momentum in emerging market economies, some consolidation of the recovery in the United States, Japan, and other industrialized economies, and the possibility of renewed weakness in Europe. The required rebalancing of global growth has not yet materialized.”

The central bank said that with strong domestic demand, slowing wage growth, and excess supply, inflation has risen according to expectations—a major factor in the decision to raise the interest rate.

While some economists are concerned low interest rates have propelled Canadians to take on unsustainable debt loads, others suggest that the rate hike will prompt people to rein in spending and get debt levels under control.