The Bank of Canada’s next interest rate announcement is in two weeks: 13 days before the next FOMC. There’s any amount of speculation about what the Bank will do, and I’m more than happy to indulge in this game as well, but let’s look at some of the background:

1) The Bank of Canada has made it very, very clear in the past that it takes its inflation target seriously; anyone who lived through the Great Deflation of the early 1990s will know that the Bank means business. It’s not going to cut interest rates just because it would make life easier for those who work in the financial sector.

2) Before the subprime meltdown, the Bank was set to increase interest rates in September: core inflation has been above 2% for several months now. It announced its intention to start tightening in April, it raised rates in July, and until a few days ago, there had been no developments in the Canadian macroeconomy that would have obliged them to revisit this agenda.

3) As far as Canada is concerned, the liquidity crunch has been more or less contained. The major players have agreed to cooperate, and both T-bill and repo rates have held fairly steady.

So it’s hard to see why at this point, the Bank would be even considering cutting interest rates. Yes, the US housing market is going to be weak for awhile, but we already knew that.

If the decision were scheduled for today, the Bank would – as did Japan – choose to not do anything to reduce liquidity in the middle of a credit crunch. The most likely scenario is still a pause, accompanied by a signal that tightening will resume in October. But as September 5 approaches, each day with no bad news may be viewed as a signal that the Bank could go ahead and raise interest rates as it had originally planned.