Amid the current Canadian administrative landscape, a major federal election presents itself as well as an economy in recession that struggles as it faces reduced business investment and a swiftly decreasing value in the Canadian dollar. Understandably so, the economy has been an important topic for Canadian voters and political figures have not strayed away from attempting to comfort the populace. Canadian Finance Minister Joe Oliver recently made headlines for stating that the Canadian economy is not in a recession in spite of Statistics Canada reporting a statistical recession. More so than usual, this election has been fixated on political groups persuading the voters that either the economy is habitual and the country must stay the course or that the economy is in need of injection and real change is the only solution. While much of this rhetorical jargon is being tossed around, the Bank of Canada in stable state set its eyes on short-term solutions to elevate the economy.
The Bank of Canada, Canada’s central bank, is seeing a lot of attention and discussion on whether to change its current interest rate or keep it constant at the current 0.5% this time around. The media coverage on this decision for many Canadians is more so about an update on the outlook of the Canadian economy rather than simply what will occur with the interest rate. In essence, the justification for the decision is what is paramount. The Bank of Canada, led by Stephen Poloz, has decided to keep the interest rate steady at 0.5%. This determination comes after the Bank of Canada has already cut the interest rate twice this year from 1% at the beginning of 2015.[1] The Bank of Canada claims its rationale for interest rate stability at this point is because the Canadian economy is already starting to recover back to the moderate trend of the business cycle. With that being said, the Canadian economy is not expected to completely rebound as the Bank of Canada has lowered its economic forecasts for the upcoming two years.[2]
Keynes’ concept of money supply and demand considers income as being the facet that affects money demand. It wasn’t until ground breaking considerations postulated by Baumol and Tobin in the 1950s that interest rate was put on the same tier as income in determining the amount of money in an economy.[3] An adjustment of the interest rate set forth by the Bank of Canada has multiple ramifications to provide the economy with either expansionary policy to grant a short-term scintillation or contractionary policy to temper the economy. However, many consumers ignore the big perspective of a modification in interest rate and merely focus on how it will influence their personal judgements regarding savings accounts, bonds, mortgages, etc. It is in this context that makes interest rate adjustments so effective in changing the economy as a whole. Rational individuals will seek to manage their budgets as best they can under the current conditions established in the money market. The collective choices made by self-interested individuals, with regards to interest rate, aggregate to fulfill the Bank of Canada’s agenda. Simply put, the money supply as a whole will shift with the interest rate regardless of whether individuals understand the means to the end. Nevertheless, there are other key factors that fluctuate with money supply and interest rate one must consider. The tried and true adage that there is a short run trade-off between inflation and unemployment means that in times of assessing a potential new interest rate benchmark, the central bank must consider its current priorities. Something else to contemplate is the current exchange rate and how the economy is managing with it. This is currently a topic of major discussion in Canada as the dollar value has significantly depreciated. Although there are exogenous aspects that impact the determining of the exchange rate such as real GDP, the interest rate in terms of the money market plays a role in its outcome. With all things held constant, if the amount of money increases in the economy, the exchange rate will rise as the dollar value will also depreciate, as is the current situation in Canada. At the end of the day, an exchange rate may not be the prime concern for policy makers as it presents winners and losers within the country’s economy. Generally, for many countries this is a trade-off between imports and exports while for Canada specifically, the falling value has helped most industries outside the resource sector.[4]
[1] "Canadian Dollar Plunges as Bank of Canada Stands Pat at 0.5%." CBCNews. CBC, 21 Oct. 2015.
[2] "Canadian Dollar Plunges as Bank of Canada Stands Pat at 0.5%." CBCNews. CBC, 21 Oct. 2015.
[3] Handa, Jagdish. Monetary Economics. 2nd ed. New York: Routledge, 2009. 121.
[4] "Canadian Dollar Plunges as Bank of Canada Stands Pat at 0.5%." CBCNews. CBC, 21 Oct. 2015.
Bibliography
"Canadian Dollar Plunges as Bank of Canada Stands Pat at 0.5%." CBCNews. CBC, 21 Oct. 2015.
"Frequently Asked Questions." Bank of Canada. http://www.bankofcanada.ca/about/educational-resources/faq/
Handa, Jagdish. Monetary Economics. 2nd ed. New York: Routledge, 2009. 121.
