Bank of Canada rate rise

May 29, 2006

Last week the Bank of Canada raised interest rates by a further one quarter of one percent. At the same time they announced that further rises were not in the works because they had reached what they call a neutral stance with interest rates that should keep the economy growing and unemployment stuck at the level the Bank appreciates that is close to 7 % which in their view is sufficiently high to act as an anti-inflationary incentive.

Remeber that core inflation is running at less than 2 % and that the only source of inflationary pressure is from the oil cartel and its price gouging practices which are designed like any true monopolist to extract the maximum economic rent from their control of the resource.

Raising rates does nothing to weaken the power of the cartel except by wrecking the economy.All the lost output and resulting higher unemployment is not necessary and represents a deadweight lost that far exceeds the benefits of less than 2 % inflation as opposed to 2.5 % or even 3 % inflation.

In the kind of globalized world economy we now live in most of the forces are disinflationary and even in the case of countries like Japan border on deflationary. The central bank`s monetarist obsession with crunching inflation through stringent bank rate belongs to a very different era. The tight money policy is well past its sell by date.

  We are going to see in the coming months if the current recession in manufacturing in Central Canada spreads to the rest of the economy. If it does there should be no doubt about who is the culprit.