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Bank of Canada Policy

The Bank of Canada has a 2% inflation target. That means they generally raise interest rates if
inflation rises materially above 2% and cut rates if inflation falls materially below 2%.

Since 1991 they’ve been pretty successful at meeting this mandate. Inflation since then has
averaged a mere 1.94%.

Now the BoC is reportedly thinking of tinkering with their 2% objective. Canadian Press reports they’re
now considering a 1.5% target after 2011.
If they made this change, one could argue that mortgage rates would stay lower long-term.  Although, many feel they’ll probably just stick with what’s working (i.e. 2%).

Even 2% might be a tough target to maintain, however. Economist Magazine predicts double-digit
inflation is around the corner for 2/3 of the world’s population. If that materializes, Canada won’t be unaffected. Many say the Bank of Canada will
likely have to brake inflation in 2009 by raising interest rates.

In reality, it’s impossible to say how rate policy will unfold in the next few quarters.  What can be said is that the Bank of Canada will soon be entering rough seas and it will be interesting to see how they steer our ship.