Inflation Slump Validates Low Interest Rates
Today, Statistics Canada reported inflation of 1.1% for August, even lower than June and July. But even at this anemic level, inflation is eating up three-quarters of wage gains. The Labour Force Survey indicates that Canada’s average hourly wage rose by only 1.5% between August 2012 and August 2013.
Subdued inflation and the weak job market both argue for the Bank of Canada to keep interest rates low. The rationale to hike interest rates would be to quell inflation, which is little more than half of the central bank’s 2% target.
The rationale for low interest rates is to accommodate investment financing and avoid upward pressure on the exchange rate. With consumers indebted and governments cutting back, business investment and exports would be welcome sources of growth and employment. Low interest rates remain a necessary, but not sufficient, condition for recovery.