Too Soon to Raise Interest Rates?

(Aired on June 1, 2010)

The move was not unexpected, but the Bank of Canada is treading on very dangerous ground in moving the interest rate up substantially this morning. The rate jumped from 0.25% to 0.5%, likely the first of several moves to get the rates up from the rock bottom levels set last year. The drop in rates in 2009 was designed to help stimulate the economy. There are signs the economy is starting to bounce back, but in raising the rates, the Bank of Canada is counting on the fact that the economy will continue to rise.

The question is - did they make the move too soon? Are we really far enough into a comeback to be able to raise the rates? The world economy is still on very shaky ground. The stock markets have not rebounded to previous levels. Europe's unfolding debt crisis has shaken expectations of a global rebound. And since we are tied so much to world markets, are we assuming too much in raising our rates?

And let's not forget the impact on the local economy. Those interested in going to the banks to raise money to get back on track will have more trouble with higher borrowing rates. Young people trying to get into the housing market will certainly be affected. While the rates are still pretty low, and there may be some truth to the fact that there is still room for lots of stimulus, the move is still risky given all the criteria.

I don't think you'll find many takers on the streets of any city in our viewing area who feel the economy has bounced back to the point where such a risk is worth taking. Let's hope Bank of Canada Governor Mark Carney doesn't regret his actions a few months down the road.