On Central Bank policy and the slowdon

The slow down in the auto sector and its consequences.
by Harold Chorney Novemebr 23, 2005

Yesterday's announcement about the layoffs in the American and Canadian auto industry is very important news. When we couple this announcement with the release from Statistics Canada of a falling core rate of inflation below the 2 % target of the Bank of Canada the alarm bells should be going off over at David Dodge's office. Clearly this is not a good time to be raising interest rates.
General Motors has its own problems with staying competitive probably because its models from a fuel efficiency and reliability   point of view no longer seem as attractive as Japanese and Korean alternatives. The GM plants are actually very productive and efficient. The problem is not enough people want to buy the cars they produce.

Automobiles like housing are a very important part of the North American economy. When layoffs occur they have much wider repercussions. The ripple effect spreads widely. Pessimistic expectations about employment and purchase plans are likely to result from these layoffs.

If the central bank ignores this and ignores the very low core inflation rate it would be making a very big mistake. Inflation or inflationary expectations are not our problem. But high interest rates and an excessive rise in the value of the Canadian dollar would be. Every time the central bank raises the rate the Canadian dollar will be strengthened. This will be disadvantageous to our manufacturing companies who export. With a growing problem in the auto sector its time to relax the grip on the interest rate trigger.The Federal government's stimulus package is looking better and better.

key words "auto industry layoffs, interest rates,core inflation rate Bank of Canada,Canadian dollar"