Tuesday, April 12, 2011

The bank of Canada sits pat

No change form 1%

Even Europe which contains some of the most bankrupt countries in the western world, moved up to 1.25%.

Meanwhile the B of C says that we are near their target of 2% inflation. How we can be at 2% when housing, food and gas are up several multiples of that is beyond me. How the three biggest costs inputs can be up 5-10% and yet the over-all number be 2%?

Even if assume their 2% is even near the mark- which I doubt. That means that this recovery is being taken out of the hides of conservative investors.

You would have to get a 4 year GIC at ING (which pays some of the best rates) to make sure that your after tax return matches inflation. And that doesn't even allow your money to grow, just keep up.

However would you really want to lock your money up for 4 years? It depends if you think the B of C can hold the rate at 2% or if they will lose control and we could be at 4-5% in a couple of years.

And Marc Carney, with a straight face, lectures us about borrowing less and saving more.


  1. "How we can be at 2% when housing, food and gas are up several multiples of that is beyond me."

    Food and gas are not included in core numbers. The Bank is stating that any increases in food and gas costs will simply result in people spending less because they have no wage bargaining power (unemployment is high). Businesses are "passing on" the increases but see lower sales at the till.

    House prices the same. If a house needs some renovations, if incomes are clamped these renovations are put off into the future, so while headline prices may increase it doesn't tell us much about the volume.

    Now if unemployment is low, food and gas prices are much more of a concern. Yes it sucks and my petrol bill has gone up and my groceries are more expensive. But it's not necessarily inflationary in the long-run. It will be one day but not today.

  2. Jesse- except everyone is passing it through to the consumer. Fuel surcharg for Air Canada, fuel surcharge for Canadian Springs etc etc

    So even if the B of C buries it's head in the sand and ignores food and gas, it will show up in everything else. Add in housing and the 2% is self-delusion.

  3. Fish,
    you are finally starting to realise how the soft landing in RE in Canada will be engineered.
    Keep interest rates low so people can continue to pay down debt while inflation is running at 4% and more. Most government wages and majority of private sector workers get yearly raises of 4 to 5%. eventually they will catch up, RE is such a big part of our GDP now, we cant afford a crash.
    This is how it will be done. The saver is always screwed for the simple reason that we live in a consumer society and to be a good citizen you must spend. Otherwise your savings will be confiscated through inflation or taxes. Rightly so.

  4. "Add in housing and the 2% is self-delusion."

    Yeah it's tough but there's a difference between higher prices with higher volumes and higher prices with lower volumes. Vendors can "pass on" the costs but, as the BoC/Fed are arguing, this results in lower sales volume instead of a wage inflation spiral.

    Option A: If my consumption costs go up by, say, 5% I should go to my boss and argue for a raise. The boss shows me a stack of resumes of people who want my job. I go away and skip the super-size option in the drive-thru.

    Option B: My consumption costs go up by 5% and I go to my boss and argue for a raise. He has lots of work that needs to be done and no viable candidates if I quit. He gives me a raise. I merrily go out and supersize my meal.

    Carney and Yellen argue we are dealing with Option A.

  5. hey fish, you see inflation running at 3.3% public workers getting automatic inflation adjustment, BoC will manufacture a soft landing in RE here, but it will take some time with interest rates severely lagging inflation rates. There is no more free market out there, it is Central bank management. The thing that keeps awake me at night is how to protect my savings in such environment, we are priced out of RE, gold and silver are at all time highs, stock market and PM as well, so it seems savers are totally screwed. Absolutely.

  6. Went out for a Sunday lunch with family members, and then crossed the street to pick up 3 boxes of Austrian cakes & pastries, cash only and no receipt. Pretty rampant all over the LML. Guess no one cares for Gordo's roof and Harper's war toys.

  7. @Anon: Leave it to Austrians to thwart the tax system.