Canadian Interest Rates in September 2010 Still Low by World Standards

When Mark Carney and the Bank of Canada raised the Canadian benchmark interest rate 25 basis points to 0.50% on June 1, 2010 it became the first of the G8 countries to raise Central Bank rates after the start of the current recession in 2008.

A further 25 basis point rate hike on July 20, 2010 brought the rate up to the current 0.75%.

Although the global economy grew over the past year to mid 2010, the recovery has been uneven with major advanced countries’ economies recording only moderate overall growth. However growth in both Asia and Latin America has been very strong. Central Banks around the world have responded to both internal and external factors in order to deal with the turmoil in the global economy as a result of the financial crisis and global recession that originated in the United States.

When the U.S. economy found its way into the current economic recession, the U.S. Federal Reserve responded with aggressive interest rate cuts down a historic low of 0.25% on December 16, 2008. Since that time, there has been no movement in U.S. rates as their economy continues to struggle with high unemployment and a continuing foreclosure crisis.

As we move into the third quarter of 2010, there is no indication that fiscal policy in the U.S. will move Ben Bernanke and the Fed away from a low interest rate policy until even modest tightening is implemented in late 2011 or 2012.

As we await yet another pending interest rate decision by Mark Carney on September 8, 2010, it will be interesting to see if the Bank of Canada will yet again raise rates in the face of the two previous moves that went unanswered by the Federal Reserve of our largest trading partner, the U.S.

What we in Canada are currently faced with is a Central Bank rate of 0.75%, which is one of the lowest in the world. In fact, if you look at the Central Bank rates of 28 of the combined G20 and OECD countries only Japan, Sweden, Switzerland, United Kingdom and the United States currently have lower rates.

G20 & OECD Central Bank Rates as of September 7, 2010

Although Canada and Australia were the only two countries from the major industrialized countries in the G20 to increase rates in 2010, the current 4.50% Central bank rate in Australia is far above the 0.75% currently in Canada.

The C.D. Howe Institute released a paper on September 2, 2010 in which their monetary policy council urged Mark Carney to raise the Bank of Canada’s overnight interest rate to 1.00% at its next announcement on September 8, 2010.

“Members who favoured more rapid increases in the overnight rate and higher targets in 12 months’ time tended to emphasize Canada’s position among countries less damaged by the crisis where returning policy rates to levels consistent with longer-term stability in inflation is more appropriate,” said the Toronto-based research institute’s report.

The council further urged the Bank of Canada to boost interest rates to 1.5 per cent by March 2011 and 2.25 per cent by September 2011.

Canadians are still enjoying historically low interest rates. As the effects of the current recession dissipate, these interest rates are sure to rise to much higher levels.