Cut Interest Rates

The Canadian Labour Congress sent the following letter to the Bank of Canada today.

September 20, 2007

David A. Dodge
Bank of Canada
234 Wellington Street
Ottawa, Ontario K1A 0G9

Dear Governor Dodge:

I write to urge you to reduce interest rates by 0.5% on October 16th to match the recent US rate cut.

My letter of June 27th noted that a higher interest rate would encourage the exchange rate’s excessively rapid rise and further reduce the viability of Canadian manufacturing. On July 10th, the Bank of Canada increased its key overnight rate by 0.25%. Since then, the Canadian dollar has jumped to its highest level in 30 years and thousands more manufacturing jobs have disappeared. The Canadian Labour Congress (CLC), which represents 3.2 million workers, believes that an interest-rate reduction is needed to mitigate this crisis.

Three recent events reinforce the analysis I presented on June 27th. First, inflation has declined further. Statistics Canada’s release of September 19th indicates that, from August 2006 through August 2007, the Consumer Price Index (CPI) rose by only 1.7% and Core CPI rose by 2.2%. Averaging the first eight months of 2006 and the first eight months of 2007 implies inflation of 2.0% and core inflation of 2.3%. All of these figures are well within the Bank’s target range of between 1% and 3%. Presumably, the high Canadian dollar will continue to dampen inflation.

In eight provinces, CPI increased by 1.6% or less. In some of these provinces, the risk of deflation appears to be more significant than the supposed threat of inflation. CPI rose by 2.4% in Saskatchewan and by 4.7% in Alberta. Relatively high inflation in Alberta results not from cheap credit, but from unduly rapid oil-sands extraction fostered by artificially low provincial royalties. On September 18th, an expert panel appointed by the Government of Alberta recommended higher royalty rates.

Alberta’s inflation does not justify maintaining nationwide interest rates at current levels. Indeed, the Government of Alberta vocally opposed the July 10th rate increase. Since Canadian inflation is generally low and falling, there is room to cut rates without unduly increasing prices.

Second, the Bank of Canada recently intervened in financial markets to mitigate the credit crunch. In doing so, it demonstrated the capacity to successfully pursue objectives other than inflation control. The Bank of Canada should be as willing to act in response to the manufacturing crisis as it has been in response to the financial crisis.

The credit crunch has increased private-sector borrowing costs, which may further reduce Canada’s anemic levels of business investment in productivity-enhancing machinery and equipment. An interest-rate cut would help bring borrowing costs back down.

Third, the US Federal Reserve cut interest rates by 0.5% on September 18th, which will lower the American dollar in relation to the Canadian dollar. If the Bank of Canada does not match this reduction, it will underpin the exchange rate’s inordinately swift increase.

The Federal Reserve’s action also signals its belief that the US economy may be headed for recession. The stimulus provided by the Bank of Canada reducing interest rates would help to mitigate the impact of an American recession on the Canadian economy.

The CLC recognizes that the Bank of Canada’s mandate is limited and that lower interest rates are only one component of the strategy needed to rebuild Canadian manufacturing. Nonetheless, the high dollar, low inflation, and the credit crunch cry out for the Bank of Canada to match the Federal Reserve’s 0.5% interest-rate cut.

Yours truly,

Kenneth V. Georgetti


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