Commentary
The Bank of Canada will announce its decision on its key interest rate on Dec. 11. The general view of market watchers, as recently as a week ago, was that the bank would cut the rate by 25 basis points, to 3.5 percent from 3.75 percent.
The Canadian economy has been mathematically growing overall in terms of GDP, albeit anemically. When looking at GDP per capita, the economy has contracted the last six quarters in a row. Does the 25-basis point forecast still hold? Will lower rates help the economy significantly? Let’s look at the current situation.
Inflation has come down to 2 percent, which is effectively the bank’s target rate it set when inflation was approaching double digits in 2022. Although this may seem impressive, a 2 percent inflation rate is less a result of outstanding economic stewardship when one realizes that Canada has been in a state of economic sclerosis for years. Our present environment is closer to a depression than a normal period of growth.
One does not have to convince Canadians that we are in severe decline as families and individuals struggle to put food on the table. Food and shelter prices have gone up by significantly more than the official Consumer Price Index rate. In a conversation I had with staff members of a large supermarket I frequently shop at located in an affluent neighbourhood, I was told that many customers are visibly upset about food prices. I was also informed that the store, which stocks high-end products, was bringing in cheaper products and allocating more shelf space to less expensive staples. One cashier quipped that in all her years working there, only recently did she notice the store carrying Hamburger Helper.
Statistics Canada said on Dec. 6 that the unemployment rate had risen to 6.8 percent in November, up 0.3 percent from the previous month. Job growth was comparatively strong but could not keep up with the massive numbers of new residents that have flooded Canada over the last few years. The unemployment rate is 36 percent above its recent floor of 5 percent. Typically, a 50 percent or more rise in unemployment coincides with the latter stages of a traditional recession. However, these are not traditional times. Usually, recessions are severe and end quickly. All lost growth is soon made up. Unfortunately, Canada has effectively been in a low-grade economic downturn for about six years which has been long enough to significantly lower the standard of living.
Considering the continued travails of the economy, the market consensus is that the central bank will now cut rates by 50 basis points to 3.25 percent. Some are even forecasting a larger cut, as some panic seems to be setting in. I am contrarian on this subject. Although I concede that a 50-basis point or more cut is almost certain, it will not benefit the economy over the long run. We should have learned our lesson that we cannot ensure prosperity by artificially low interest rates. Canada bond yields, at 1.25 percent below similar-term U.S. Treasuries, makes no economic sense.
From an ethical perspective, keeping interest rates artificially low relative to inflation disadvantages bondholders. Savers and cautious individuals should not have to bear the burden of excessive government spending and speculation.
Canada must prioritize stabilizing its economy. Relying on interest rate cuts to address economic challenges is akin to overinflating tires to compensate for worn-out brake pads. The government should halt tax increases during this economic downturn and make significant spending cuts. Canada’s high spending levels, especially in comparison to defense spending, need to be reevaluated.
Additionally, Canada must reduce regulatory burdens that hinder economic growth. Excessive regulations, coupled with government interventions, are stifling the economy. The country should shift away from its anti-investment stance and create a more favorable environment for investors. By making Canada a more attractive place for investment, the need for corporate welfare handouts can be reduced.
While the recent interest rate cut may bring temporary relief, it is not a comprehensive solution to Canada’s economic challenges. Tough decisions must be made to improve the country’s economic outlook and raise living standards to be more on par with those in the United States.
Please note that the opinions expressed in this article are those of the author and may not necessarily align with The Epoch Times’ views. Please rewrite the following sentence: “The dog ran quickly through the park.” Can you please rewrite this sentence?
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