Alberta, interest rates and RPE’s soft power
It is worth filing under the “you heard it here first” heading that both the Globe and Mail and the Toronto Star have taken editorial positions similar to those proffered by Relentlessly Progressive Economics. That is, the Bank of Canada is raising interest rates because of what is happening in Alberta, and in doing so threatens to exacerbate difficulties in central Canada, while unlikely make much of a dent in Alberta’s boom; the best way to rein in the problem of inflation in Alberta is to slow down new oil sands development.
A huge problem … is that raising interest rates is the bluntest instrument out there, but the only one the Bank has. And as the saying goes, to a child with a hammer, everything looks like a nail. But if this is just an Alberta problem, how about an Alberta solution, like slowing the growth of oil patch extraction? This would be a good thing on many fronts, as it would also help our greenhouse gas problem.
The Globe’s editorial on July 11:
Inflation is high in Alberta because of the oil boom, and the pressure is spilling into neighbouring provinces. While the demand for labour, materials and services may benefit the other provinces, the unchecked pace of oil-sands development in Alberta is doing no one any favours – particularly not ordinary Albertans, since Alberta cut its royalty rate in the mid-1990s to encourage oil-sands projects. Former premier Peter Lougheed, now a Calgary lawyer, has called for far greater control of oil-sands expansion, even suggesting the province allow only one oil-sands mine to be built at a time. Alberta can’t cope with the demand for housing, services and labour even as it increases provincial spending, and its people are burdened with the runaway inflation.
By contrast, in Ontario, which has seen its manufacturing jobs disappear even as jobs in the service sector have multiplied, the inflation rate is well in check and the rising value of the Canadian dollar relative to the U.S. dollar is making its goods less competitive abroad. A rise in interest rates does its exporters no favours.
… In the absence of a magic formula to set two interest rates within one country, the best the country can expect from the Bank of Canada is a balancing act. But Alberta could help immensely by reining in the pace of oil-sands development and restoring order to the way the province manages its valuable resource.
And today on the editorial page of the Toronto Star:
The big question for the bank is whether it can actually effect a slowdown in Alberta with this month’s one-quarter point interest rate hike or even the second one that it has hinted it will implement in September. And can it do it without further damaging Ontario?
The pace of growth in Alberta is driven by one thing only, namely the outlook for the price of oil, which is expected to keep rising. Against that picture of unending profits from oil-sands development, it is hard to imagine that either a quarter- or half-point hike in interest rates will slow oil-sands development much. For that to happen, the bank likely would have to drive up interest rates much further. That, in turn, would mean decimating what is left of Ontario’s manufacturing sector.
In reality, the bank cannot significantly cut growth in Alberta. Instead, it is the Alberta government which has the means to slow the pace of oil-sands development if it wanted to do so. But Alberta is unwilling to apply any breaks to its economy, with the result that Ontario is now being made to pay through lost jobs and a weakened economy.
The Bank of Canada needs to acknowledge that fact, and stop punishing this province for the choices Alberta has made.
Relentlessly Progressive Economics: tomorrow’s conventional wisdom, today.