Wednesday, March 3, 2010

Hike Rates Often and Fast

You may recall that back on February 10th, we noted that the heads of the country's six largest banks had privately told federal government policy makers that they fear the wide-ranging economic fallout of a U.S. style binge-and-collapse in housing hitting Canada.

These pressures lead to the change in Canadian mortgage rules that were announced on February 16th.

It may interest you to know that those aren't the only pressures being exerted for change.

The C.D. Howe Institute put out this paper last week urging the Bank of Canada to raise rates aggressively once its rate hike moratorium ends on June 30.

The report stated:

  • The Bank (of Canada) should keep its conditional commitment, but should thereafter raise the overnight rate sharply by 50 basis points at every announcement date (after June 2010) until mid-2011.
  • If inflation continues to rise, the BoC should be prepared to hike rates proportionately more. This assertive policy style is based on the 'Taylor Principle' - after U.S. economist, John B. Taylor.
  • Heading off inflation will necessitate “aggressive” rate increases (50 basis points per BoC meeting), starting this summer.

This report comes on the heels of the latest rate hike by the Reserve Bank of Australia which raised it's central rate by a quarter percent to 4%.

Canada's rate, by contrast, remains at 0.25%.

If the advice were implimented, you would have a five year rate rising to near the historical 20 year average of 8.25%.

You can almost hear the ticking sound now, can't you?


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  1. I'm not sure the BOC has the courage to do this.

  2. I frequent this blog every day and I thought you might like an update on how fast rate hikes have affected Australia in the mortgage market.

    Would you say this is a forward looking indicator of Aussie's real estate market?