Bank of Canada too hawkish on rates, CIBC report argues

Posted on 30. Apr, 2010 by in News

The Canadian Press – Published On Thu Apr 29 2010

OTTAWA — CIBC is casting doubts on the Bank of Canada’s analysis of the country’s economic performance, suggesting it may be overestimating the potential threat from inflation and is too ready to begin raising interest rates — particularly since the dollar is high and government spending is on the decline.

CIBC chief economist Avery Shenfeld says in an analysis that the central bank’s dependence on the output gap — the amount of unused capacity in the economy — may be an unreliable indicator of inflationary pressures.

Shenfeld adds that the output gap is a notoriously difficult indicator to measure accurately.

“The IMF (International Monetary Fund) judges Canada’s gap as more than half per cent wider than the Bank of Canada estimate,” he writes.

“That doesn’t sound like much, but it would make a material difference in how hard we need to slam on the brakes through interest rate hikes in the coming year.”

Last week, central bank governor Mark Carney sent a strong signal to the markets that he is preparing to raise interest rates, possibly as early as the next announcement date of June 1.

In a separate report, CIBC economist Peter Buchanan says that Canada’s corporate sector may be in a strong position to withstand higher rates but remains at risk from a stronger dollar.

Buchanan says Corporate Canada is benefiting from low debt levels, which put the country’s companies in better shape to withstand higher interest rates than Canadian households.

Full article published here

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