http://www.vancouversun.com/business/Interest+rates+stay+CIBC+says/2782003/story.html
Summary:
With the Canadian economy doing well in the past six months, interest rates are expected to rise from the Bank of Canada. A reason for Canada to keep the interest rate low after July is because the United States will have a gradual approach to raising rates. Inflation is expected to slow down and government is expected to control our spending habits. The interest rates are promised to be kept at 0.25 percent until the end of June. In February, Canada’s inflation rate was at 2.1 percent when it was expected to be at 1.6 percent. The inflation rate is growing rather quickly.
Connection:
The Bank of Canada currently has a low interest rate which increases the money supply. The monetary policy is in effect right now because there is change in the money supply. The low interest rates influences consumer and business spending causing inflation. The banks are now expected to raise the interest rates to slow down the increase in the money supply. Since inflation is higher than expected, there should be low unemployment rates right now. The Phillips curve represents the negative relationship between rates of unemployment and rates of inflation. The government can also control the inflation rates of the economy by the fiscal policy. The fiscal policy changes the level of government spending and taxation to help stabilize economic conditions. With rapid growth of inflation rates, government can reduce their spending and increase the level of taxation. This would reduce the amount of spending by individuals and the growth of inflation rates would slow down.
Reflection:
The Canadian dollar overtaking the American dollar does not necessarily lead to a positive outcome. When the Canadian dollar has more value than the American dollar, it becomes more expensive to purchase things in Canada. Consumers would tend to purchase things from a cheaper provider. When this happens, the manufacturers in Canada lose consumers to the United States. The demand for Canadian companies decreases. As a result, the manufacturers in Canada have decrease in productivity and layoffs are a possibility. The Bank of Canada and the government play important roles to help maintain a stable inflation rate so that our dollar value does not raise or drop too much.
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I agree that the lay-offs and drops in productivity are definitely a possibility. What I also think might happen is that due to the unexpected inflation rate that resulted, the bank may have to take more drastic measures and will increase interest rates. This is the most common way of lowering inflation as it will decrease consumer spending and increase investing and saving of cash. I also agree that it would be in Canada's best interest if its dollar didn't overtake the American dollar because since Canada and America have similar resources on its land, even if Canada's dollar is slightly higher than America's, then Canadian companies will lose a lot of revenue.
ReplyDeleteWith the Canadian dollar being stronger than the American dollar, it is an indicator that our economy is strong. With that in mind, to decrease inflation, the bank probably has to increase interest rates because it would encourage investing. When the economy gets better, and inflation rate is lower, the interest rates would probably lower again to stable the economy. But with high interest rates, people may look south of the boarder and go spend money there due to the cheaper prices. This would cause Canada to lose business to the United States.
ReplyDeleteIt seems that our economy, no matter how well we are doing, will always be limited by our neighbor down south. When the Canadian economy is doing well and our dollar value increases, many consumers will look towards the U.S. for their shopping needs. Raising interest rates in Canada may steer consumers away from the states, but many of us are still recovering from the economic depression. Since this is a discretionary fiscal policy made by the government, it will take sometime before the increasing interest rate will take effect on consumers due to the “outside lag” factor.
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