Bank of Canada Wimps Out
The Bank of Canada did not cut its target interest rate enough this morning, leaving it a full percentage point above the US central bank rate. As I argued last week, the Bank of Canada should have matched the American Federal Reserve and cut to zero.
Astonishingly, the Bank of Canadaâ€™s press release acknowledges that we are headed for deflation: “Total CPI inflation is expected to dip below zero for two quarters in 2009.” If the Bank is serious about its stated policy of targeting 2% inflation, it should have cut interest rates more to avert deflation.
By projecting that inflation will not return to 2% until 2011, the press release confirms that rising inflation will be extremely unlikely for the next two years. It paints a dire but accurate picture of a shaken economy desperately in need of stimulus. If inflation is not of concern and the economy needs stimulus, it seems that interest rates should be cut as far as possible to provide such stimulus.
The Bank of Canadaâ€™s release concludes by acknowledging the need for “further monetary stimulus.” (It proposes to judge not the need for more stimulus, but the extent of such additional stimulus.) But if the Bank knows that it will cut interest rates deeper and monetary policy takes time to have an effect (if any), why did it not just cut deeper today?
The Bank of Canadaâ€™s timidity reinforces the need for a substantial stimulus package in next weekâ€™s federal budget.