Rationale of: Bank of Canada Holds Interest Rate Steady with respect to monetary policy

When the interest rates are held steady by the Bank of Canada, it means that there is no change in this rate.  Hence, the market will not affect be affected in terms of demand, production and prices. The borrowing and lending interest rates by the commercial banks will remain unchanged. The financial markets will continue to lend more as long as the borrowers are able to repay at the prevailing interest rates. In contrast an increase in interest rates will lead to increase in borrowing and lending rates among the financial institutions.  The Bank of Canada held a steady interest rate as a cautious measure against the uncertainty in the market.  The uncertainty makes the bank to be cautious in adjusting policy rates so as to do away with monetary policy stimuli.  The uncertainty in the market is brought about by trade policies that are more protectionist and the risks related to renegotiations on NAFTA (Evans, 2017).  Such uncertainty means that some things have to be understood clearly before the central bank decides to raise the interest rates. Such knowledge includes an understanding of how rate increment affects the level of debt of Canada.  

The steady interest rate is, therefore, a cautionary measure approach to the kind of debt being taken by the Canadian Bank.  Even though the performance of the economy of the country is fine, an increase in the interest rates could greatly affect the ability of many people to spend their income while stealing bearing big debts. Such debts have arisen from buyers borrowing a lot, in terms of hefty mortgages, due to attractive housing market (CBC News, 2017). Maintain the interest rates at a steady level of 1 percent means that the expenditure by households in the market will be sustained.  In fact, the prevailing interest rate currently remains the same, which underlines the intention of the bank (Bank of Canada, n.d).

The constant interest rate could be aimed at keeping the interest rates low, presently below 2 percent. This would encourage an environment of low inflation so as to encourage more consumers spending and thus, keep the demand in the market high. The other problem involves the challenge of predicting the economic developments in the future amidst increasing tendency to have protectionist policies. There are many possible surprises relating to the changes in the policies and the market that can impact on the path the economy is to take in the future. Theses includes productivity growth rate, economic outlook in foreign markets and the sentiments held by businesses regarding the direction of the economy. This uncertainty means that making a future prediction is very difficult especially in relation to inflation and hence consumer behavior. Hence, the Canadian Bank has to be very careful with whatever monetary decision to be made in relation to adjusting the interest rate. The bank is mandated to manage the monetary policy in a way that will promote the long-run wellbeing of the economy in terms of inflation, stable prices, consumer expenditure and productivity growth, all of which are affected by the prevailing interest rate (Bank of Canada, n.d).   In a market that is open, the bank has to ensure that prices are stable, while lending and borrowing rates of interest are in tandem with expected market outcomes.

References

Evans, P., (2017).Bank of Canada keeps benchmark interest rate steady at 1%

CBC News, (2017) .Lot of things that have to come together' before next rate hike, Stephen Poloz says. Retrieved from: http://www.cbc.ca/news/politics/bank-of-canada-poloz-interest-rates-cautious-1.4372066