Lower Inflation Frees Carney’s Hand
Statistics Canada reported today that consumer prices decreased in December, lowering the annual inflation rate to 2.3%. The Bank of Canada’s core inflation rate declined to 1.9%.
Tame inflation leaves room to lower interest rates. If unemployment continues to rise, the Bank of Canada should reduce interest rates to boost the economy and create jobs.
The modest inflation rate still exceeds the 2.2% average increase in hourly wages. Sluggish wage growth is another sign of a weak labour market, which calls for stimulative fiscal and monetary policy.
Although the overall price level decreased, shelter costs rose in December. Statistics Canada noted that higher electricity prices powered the increase in shelter costs, especially in Alberta.
These figures could generate more debate about regulating electricity prices in that province and removing the HST from electricity costs in Ontario. Broader discussions about housing affordability are also needed across Canada.
UPDATE (January 21): Quoted by Postmedia
I am not sure lower interest rates will deliver very much in terms of economic stimulus. The corporates are sitting on a stack of cash and consumers are already 160% debt to income. Monetary policy is not simply dead at these levels but counter-productive given the implications of still lower rates.
Strikes me that a better argument would be government stimulus funded by low interest debt issuance and higher corporate taxes perhaps tempered by steeper depreciation schedules.
I also advocate fiscal stimulus and replacing corporate tax cuts with targeted measures like accelerated depreciation.
However, the Bank of Canada does set interest rates periodically and we presumably want them kept low if not reduced further.
At the margin, low interest rates make it less attractive for corporations to hold cash and more attractive to borrow to finance investment.
interesting that the banks have decreased mortgage rates again last month. I wonder if they are getting nervous with the housing situation. I know most of the borderline mortgages are covered by CMHC, but I am sure a housing bust would be a death blow for them. We only have 5 big banks and that is not a lot to share the pain amongst. Given the debt levels and the potential for toxicity, I am sure that lowering of the rates is a sign of something going on.
As I have said before, we have a housing bubble happening, but it can be managed, but somehow it has got to be deflated a bit and for sure we cannot keep adding to the consumer debt levels. Ultimately rising wages would be the solution, however the reality is, we have declining wages. Not sure how that will help in deflating this bubble in an orderly fashion.
We need a move by the feds in a new direction- 180 degrees from the current austerity that they have planned. Sadly the tories know this, but somehow they seem oblivious to consequences.
Deflating wages and polarizing income cannot keep that housing bubble going.
“At the margin, low interest rates make it less attractive for corporations to hold cash and more attractive to borrow to finance investment.”
Nice theory got any robust proof of that being the case since 2007? Not to be mean, but the days of blindly asserting hypotheses as truths is over for economists… even progressive ones.
You also need to address the problem that corporates can invest their cash wherever they like.
Oh and all things being equal at the margin the lower the cost of capital the more likely firms are to switch to more capital intensive forms of production. In the face of stagnant demand that gets more profitable enterprises and less jobs.
That of course is pure conjecture on my part:),
So, is your position that the Bank of Canada should raise interest rates? Or that the target interest rate does not matter?
Low interest rates have sustained demand in Canada … via increased mortgage debt. That’s not sustainable but it still underlines the fact that monetary policy has had some purchase here, unlike the US.
But I agree with Travis re the need for action on the fiscal side, taking advantage of those ultra low rates.
Erin my position is straight forward. I do not think a “lower” rate than we presently have will do very much. I think the marginal effect diminishes as you head towards zero. Yet still lower interest rates might entice consumers to take on even more debt. But I think that even though increased private debt may have a salutatory effect at the aggregate level it will be disastrous at the individual level.
The neoliberal insistence on monetary policy for any and every macroeconomic remedy is by now discredited. We need to making the case fro progressive fiscal policy both in terms of taxes and an expansion in the definition of and spending on public goods.
A commitment to full employment is not only a superior moral position to take it is also a superior macroeconomic policy paradigm in terms of growth and distribution.
I agree that expansionary fiscal policy would do more than expansionary monetary policy, but they are not mutually exclusive. My post called for both.
The point of departure was a decline in inflation, which creates more space for monetary policy.
You and Andrew raise an important concern about mortgage debt. I think the appropriate response is to reign in mortgage lending by changing CMHC policy, while keeping interest rates low and perhaps reducing them further.