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Inflation Collapse Confounds Monetary Hawks

Statistics Canada reported today that inflation collapsed to just 0.4% in April. The Bank of Canada’s core inflation rate, which excludes volatile items, fell to 1.1%.

Continued low inflation does not provide a rationale to raise interest rates. Perhaps for that reason, Canadian monetary hawks have shifted their rationale for higher interest rates.

In 2011, the C. D. Howe Institute released a paper entitled Overnight Moves: The Bank of Canada Should Start to Raise Interest Rates Now. It argued:

If more ‘no-change’ decisions are made by the Bank of Canada regarding its policy interest rate, inflation expectations might begin to slip loose of their 2 percent anchor. . . . A return to seriously above-target inflation can be addressed only with seriously above-normal interest rates. That is a risk worth avoiding. And it can be avoided only by embarking sooner, rather than later, on the process of steadily increasing the overnight rate target.

(Here was my response to this paper at the time.)

After nearly two subsequent years of no-change decisions, inflation remains well below the Bank of Canada’s 2% target. But the C. D. Howe Institute is still advocating higher interest rates.

Earlier this week, it released a paper entitled The Dangers of an Extended Period of Low Interest Rates: Why the Bank of Canada Should Start Raising Them Now. This paper presents a grab bag of alternative rationales to urgently raise interest rates.

Paul Krugman recently noted a parallel shift in the Bank for International Settlements’ ongoing calls to raise interest rates: “Higher interest rates are always the solution; it’s only the problem they’re supposed to solve that changes.”

 

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Comments

Comment from Purple Library Guy
Time: May 17, 2013, 9:07 pm

I’m suspecting the problem they’re really supposed to solve but that nobody wants to come out and admit is low bond yields.

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