Tuesday, April 20, 2010

Bank of Canada approaches its day of reckoning

Canada's central bank has announced that it will not be raising rates yet. However, sooner or later this will change. The thing is, setting the rates is a tricky balancing act. If they don't raise them eventually, inflation will become excessive; on the other hand, if they raise them too soon or too much, they will choke off the recovery. After all, high rates mean more of people's previously disposable income will be going towards paying their mortgages and credit cards, and businesses that might want to expand will face higher borrowing costs. And this is likely coming within the next couple of months, whether we like it or not.

Unfortunately, rising oil prices are likely to complicate matters further. The thing is, expensive oil is both inflationary and anti-growth, so we could see a burst of stagflation within the next few years. Hang on; it's going to be quite a ride.

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