It seems that everyone but the consumer wants the Bank of Canada to raise interest rates; something they have stated is not a good idea.
Interest rate increases are usually reactions to an economy that is heating up and fueling inflation. The idea behind this approach is to make borrowing by business and consumers alike more difficult and thus slowing down the growth. The Bank of Canada has established its limits as 2 to 3 percent growth before any action on inflation is taken.
Recent reports by Stats Can have shown inflation to be in the neighbourhood of 2 percent and with a prediction of 3 percent by year's end. The problem here is that it isn't the economy that is heating up, it is the energy sector that is heating up the statistics. So essentially it is the cost of energy on its own that is the root cause of any inflation Canada is experiencing. Bank of Canada Governor, Mark Carney said as much during a recent public address in Toronto. What he was telling the government was that they needed to get their house in order and address the source of the problem. To this point the government has taken no action.
This lack of movement by Finance Minister Flaherty firmly establishes the government's reluctance to get involved in private sector business. The problem is that all other business as well as the consumer is suffering for this approach or rather, lack of. Whether this is pandering to the oil industry can only be speculation.
The CD Howe Institute; a Canadian think tank have recommended an interest rate increase but even they are split on the issue. Other similar groups have emphatically called for interest rate increases as well, however they are often partisan toward business and or conservatism.
The problem here is that rate increases affect the consumer again on more than just borrowing where mortgage and loan rates will increase but also in the cost of goods and services. It is a well established fact that business operates on borrowed money. Therefore any increases to the cost of money will likely be passed on to the consumer in the form of higher prices. This approach is in and of itself inflationary.
So, in the end the consumer pays higher prices without corresponding increases to income forcing them to purchase less. None of this is new. It is a principle applied time and again to slow down an economy and has worked in some measure. The problem here is that the Canadian economy is not booming, the oil economy is. The industrial heartland is arguably in recession as is much of the Atlantic provinces.
It would seem that rate increases in the current economy would be contraindicated. Let us hope that the government will act to protect the consumer from rate increases that will first and foremost affect housing.
The question now is will Mark Carney raise rates or continue to urge the government to act on a readily identifiable problem?
Harold Hotham
http://www.comparevillage.ca
harold.hotham@comparevillage.ca
