Canada does not need lower interest rates

  • National Newswatch

In contrast to the U.S. Federal Reserve's decision to raise interest rates for the first time in nine years earlier this month, there is a growing chorus as we enter 2016 for the Bank of Canada to once again lower rates.Against this backdrop came the recent announcement from the Canadian Press that the Bank's Governor, Stephen Poloz, is the Business Newsmaker of the Year.He was praised for, among other things, his “prescient” and surprise interest rate reduction at the beginning of the year. At that time, Poloz characterized the cut as taking out “insurance ... in response to the recent sharp drop in oil prices.”Fast-forward to July, the flagship overnight rate was lowered again by 25 basis points but this time accompanied by much more bleak commentary.One needs only to examine the Bank's Monetary Policy Report to observe that the projection for returning to “full production capacity” is a never-ending postponement. The negative trend was confirmed by the December 23rd Statistics Canada release showing gross domestic product unchanged in October, after falling 0.5 per cent the previous month.So, is additional monetary stimulus, vis-à-vis lower rates, required to boost the Canadian economy? Asked otherwise, are too high interest rates inhibiting growth in aggregate demand? And again, are the economic headwinds a result of a shrinking money supply or the inability to get a loan or mortgage (notwithstanding the federal government's attempt to tighten requirements for the latter)?Monetary policy is not a cure for all economic ill. It has its limits and in recognition of them the Bank has updated its framework for unconventional measures. They range from the largely ineffectual “forward guidance” to the more invasive (large-scale asset purchases) and contentious (negative policy rates).Cutting interest rates, for example, will do almost nothing to fill the gap of significantly lower capital spending by companies in Canada mostly as a result of lower energy prices. Expenditures on construction and machinery and equipment are expected to decline for the first time since the 2009 recession.Nor will a cut to rates bring back job losses, especially in resource-rich provinces, or restore equity values and dividend payments in the energy sector – the second largest group of stocks in the TSX Composite – as evidenced by this year's poor performance.The theoretical benefits of a twenty-five basis point cut are inadequate against today's hard economic reality.Fiscal policy, on the other hand, could help to stimulate the economy although if “modest deficits,” as Prime Minister Justin Trudeau characterized them during the campaign, become substantial and structural, this will pose its own unique set of challenges. There has already been a shift in federal positioning, from annual deficits under $10 billion to a focus on the debt-to-GDP ratio which could pave the way for $25 billion a year deficits.The ability of policy makers – or even the Bank of Canada – to steer the Canadian economy is not all-encompassing. While influential, there are too many variables outside of their direct control (e.g., international trade agreements, commodity traders and speculators to say nothing of regional conflicts and fluctuations in weather) for them to have complete power over a $2 trillion enterprise called the economy.Even a lower loonie, which traditionally helps to boost exports, has not had the same positive impact as it once did; current manufacturing levels are significantly lower than pre-recession ones and real manufacturing output has been stuck in neutral for more than twelve months.Lowering interest rates now will make it more difficult to return to a normalized rate environment in the future and will serve to exacerbate other challenges such as household debt, which continues to hit new records. While the optics of inaction are unpleasant – and perhaps unpalatable for policy makers – reducing rates to near-zero levels by taking out more insurance is not the solution to Canada's economic problems.Evagelos Sotiropoulos holds a B.A. and M.A. in political science from the University of Toronto. He writes on Canadian politics for The Hill Times and on Orthodox Christianity for HuffPost Religion. Evagelos can be reached at: [email protected]