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Newsletter #2

Vol. 1, No. 2 May 25,2006

Yesterday's interest rate increase by the Bank of Canada could be the last one for a while. In its press release, the BoC made no mention of the necessity for further rate increases; this is very plain language for a central bank. Normally, a central banker will revel in the use of obfuscatory language.
For consumers and businesses alike, this makes planning easier. Individuals or companies with floating rate mortgages or other debt can breathe easier as their cost of money will be stable and perhaps declining over time. Implicit in the BoC's decision is its belief that inflation wil remain well controlled and this is also good for planning.
Linked to this watershed decision has been the performance of the Canadian dollar. A long term bull on the Loonie, I see it rising inexorably towards parity. My view has been, and is, that the current account, trade and budgetary surpluses are powerful fundamentals especially when compared with the opposite fundamentals facing the US dollar: massive current account, trade and budgetary deficits.
It is interesting to note that the Canadian currency does well even when commodity prices are weakening. Merger and acquisition activity increases the demand for Canadian dollars. As well, Canada is close to becoming a net lender to the rest of the world as it repatriates foreign debt and increase its foreign investments.
A byproduct of all this, and I have to believe that it had an influence on the BoC's decision, is that our interest rates are significantly lower than those in the United States, 74 basis points at the ten year term, for example, and this should continue to be the case indefinitely.
Thus, this is a wonderful economic moment for Canada and Canadians.

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