It’s Time to Cut Interest Rates

Today’s Consumer Price Index (CPI) release reveals that inflation has dipped to 2.4% and core inflation has fallen to 1.8%, its lowest level since June 2006. These figures undermine the argument that interest rates should be maintained to slow inflation.

As the National Post reports, “A weaker-than-expected rise in the inflation rate for October could give the Bank of Canada room to cut interest rates.” Jim, Andrew, I and a delegation of other union economists will press the case for lower interest rates in meetings at the Bank of Canada later this morning.

Between September and October, goods prices fell somewhat while service prices rose slightly. Although retailers have not lowered goods prices as much as warranted by a parity exchange rate, the high dollar seems to have dampened inflation.

CPI exceeded “core CPI” mainly because of gasoline prices and mortgage-interest costs. Although gasoline prices fell from September to October 2007, they are still significantly higher than in October 2006. To the extent that lower interest rates moderate the exchange rate, they could slightly increase gasoline prices. However, they would clearly tend to reduce mortgage-interest costs.

3 comments

  • Good luck with the meeting, I hope your group can make a dentin the policy walls within the BOC, or at least spray some graffiti on them.

    I am always amazed at how analysts stick only to the current statistics when making decisions. We do need to look at projections as well. And the biggest projection one has to look at regarding interest rates is the impact the dollar is having on the manufacturing and other wealth generating sectors of the economy. It does not take a rocket scientist to figure out that the medium and longer term outlook of these current and impending adjustments to the economy will set us on a downside trajectory. You can hide your head inside all the comfort of selected statistics such as the current employment numbers, but walking into the abyss just makes no sense. We need intervention and we need lower rates and we need them now.

    (my report got stuck in a bog of bad statistics Andrew, we need better international stats).

  • Why do you accept the Gov figures CPI?

    Inflation is not price increases, but the growth of money supply, price increases are the sympton not the inflation.

    The money supply is growing by 8% Growth is 3%ish, that 5% extra money is going somewhere, raising housing prices and consumer goods.

    I know from my food bills, my energy bills and my property tax bills, that my personal cost of living is rising significantly more than 2.4%

    To Join the U.S. in a rate cutting cycle will devalue our currency as we join the U.S. race to zero dollar value. The U.S. is doomed we need to find a different answer than debasing our currency to maintian their purchasing power. The U.S. dollar will continue to fall, how far can we afford to follow them down?

    There is going to be a U.S. dollar crisis and we should at least TRY to be a bastion of sound money.

    Canada should be hold interest,
    lower our 50% U.S. currency reserves to a mixed basket including gold.

  • Shouldn’t we be worried about rejigging our trade relations (port, rail infrastructure investments and developing local economies) more than playing interest rate games given the problem is a devaluing US dollar?
    Won’t growing boomer public health-care expenditures create a double-counted false inflation uptick (private employment and capital magically disappears into the public purse yet quality-of-livings rise)?
    We should be building wind-turbines and Zenn cars for the world rather than looking for accounting gimmicks that mask the fact the US consumer is no longer buying cars and beaver pelts.

Leave a Reply

Your email address will not be published. Required fields are marked *