Bank of Canada cannot go it alone much longer

- "The Bank of Canada (BoC) has just raised its key rate a third time while the central banks of most of the other advanced countries look on from the sidelines."
- "The BoC’s actions are in response to the more vigorous recovery in Canada, which is benefitting from a strong rebound in economic growth in the emerging countries. Moreover, in terms of domestic demand growth, Canada stands in sharp contrast with the United States, where the housing crisis has caused household balance sheets to deteriorate considerably."
- "In light of the respective shocks suffered and present inflation levels, while the BoC proceeds to normalize rates, the Fed should stay put for yet another year."
- "Although exports as a percentage of GDP have fallen drastically since 2000, the fact is that the Canadian economy remains a small open economy whose monetary policy cannot diverge outrageously from that of its principal trade partner."
- "In 2003, the central bank had to backtrack after learning this lesson the hard way. In the period when the yield spread on 2-year government bonds reached 200 bps, the loonie gained US$0.10."
- "In our opinion, the BoC will go ahead with only two more 25-bp hikes seeing how both international trade and residential investment are expected to detract from economic growth in the coming months. Canadian monetary authorities should then mark time before raising rates further until the U.S. economy gets up and running again."

NBC Weekly Economic Letter 20100920

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