Interest rates should stay low through 2011: CIBC

A report from CIBC World Markets released today aimed to calm investors’ nerves about the prospect of the Bank of Canada raising interest rates in the near future.

According to CIBC’s Global Positioning Strategy report, there are many reasons for the Bank of Canada to hold off on hiking interest rates substatnially for the next few quarters.

CIBC chief economist Avery Shenfeld urged Bank of Canada Governor Mark Carney to be careful about raising interest rates ahead of the U.S. Federal Reserve and other central banks.

“Why should Governor Carney care about getting too far ahead of the U.S. Federal Reserve [in raising interest rates]?” said Shenfeld. “Because when the Fed is still on hold, it reflects Washington’s judgment that a self-sustaining rebound isn’t yet assured.”

If the Bank of Canada chooses to aggressively raise interest rates over the summer on the premise of curbing inflation, this could “send the Canadian dollar into record territory,” said Shenfeld. “While factories are recovering in Canada alongside a global industrial revival, output remains nearly 20% below the pre-recession peak, and wages are now substantially above those stateside without the productivity gains to match. There’s only so much of a competitive challenge that non-resource exporters can take in short order.”

A high Canadian dollar could dramatically curb Canadian exports and threaten job security in the already vulnerable manufacturing sector.

Though inflation has been on the rise in Canada, the report claims there is no need to raise interest rates to curb this growth, as production levels are still below normal. This in turn will keep wages down in the short turn and stave off inflation on its own.

Keeping the interest rates low would have added benefits for both the federal government and that of Ontario, as they are expected to borrow a substantial amount of money in the form of bonds in the next two years.

To view the complete report, click here.

(04/08/10)