BUS400 Bus Final Assignment: The Bank Of Canada (Case Study Sample)
BENGALURU (Reuters) - The Bank of Canada will leave rates unchanged until April, held back by the uncertainty over how highly indebted consumers will handle increasing borrowing costs and the unknown fate of the North American Free Trade Agreement, a Reuters poll found.
Having increased interest rates in July and September, the consensus in this week's poll of over 30 economists was for the BoC to hold fire at its upcoming rate-setting meeting on Dec. 6.
About a third of common respondents, who participated in the latest and previous poll taken ahead of the central bank's October meeting, pushed their call for a rate hike to early next year from December.
That shift in view is largely based on the cautious tone of the central bank at October's meeting, highlighting that the course of further rate increases will be mainly data-driven.
The central bank is forecast to hike next in April, by 25 basis points, taking the policy rate to 1.25 percent.source..
BUS FINAL ASSIGNMENT
Question 1 (6 marks)
Based on this article, what kind of monetary policy do you think the central bank is pursuing? In a carefully written short answer (approximately 300 words) decide whether you support (agree with) this policy action or whether you disagree. In either case, please cite specific evidence from the article to justify your position.
While the central bank raised interest rates in July and September 2017 they are concerns about the health of the Canadian economy because of uncertainties. As such, the central bank still prefers low interest rates until April of 2018 and this is an expansionary monetary policy (Bararia). “Canadian household debt as a share of income was at a record 167.8 percent in the second quarter”. This indicates that there is high household indebtedness and increasing the interest rate would plunge many into more debt. Additionally, “the threat from U.S. President Donald Trump to scrap NAFTA has dampened the outlook for Canada's economy.” President Trump has sought to renegotiate the North American Free Trade Agreement (NAFTA) with Canada and Mexico to seek more favorable terms for the country, which would hurt Canadian exports that are mainly sent to the U.S.
I support the expansionary policy since low interest translates to low interest payments for both household and corporate borrowers. Among firms, those that borrow and invest are likely to get positive returns, grow and hire more workers. Similarly, low inters rates mean that households do not allocate a huge proportion of their incomes paying debts, and higher interest rates can even dampen consumer spending, which affects the country’s aggregate demand. In keeping the interest rates steady, the central bank has focused on the effect of changes on rates that affect consumers and savers. The cautious tone is consistent with the need to remove the stimulus over time, as this measured approach means that adjustments will be made when more data is available when there is more certainty about the resilience of the Canadian economy. As such, the expansionary monetary policy is appropriate, and since uncertainty surrounding trade protectionism affects how companies invest a cautious approach to changing interest rates minimizes uncertainty.
Question 2: (4 marks)
Why do you think that the North American Free Trade Agreement (NAFTA) negotiations have caused the monetary authorities at the Bank of Canada to be cautious? What are they worried about and why? Use evidence from the case, and that which you have learned in this course to write a short answer explaining your opinion.
Firms will invest less because of uncertainty on NAFTA negotiations, as they would also be cautious, but over time the low interest rates will not be required. Uncertainty about the impact of the U.S. trade protectionism was considered
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