Friday, February 03, 2006

It's Time to Stop Raising Interest Rates

In reporting on Michelin’s decision to close its factory in Kitchener, Greg Keenan and Heather Scoffield hit the nail on the head when they described the problem’s facing Ontario’s manufacturing industry.

“The manufacturing sector has lost more than 100,000 jobs over the past year, and about two-thirds of those job losses were in Ontario. The key issue is the Canadian dollar. The Canadian dollar has skyrocketed over the past couple of years, in tandem with higher commodities prices. The currency has appreciated about 35 per cent since 2002.”

Manufacturing is not the only industry to be hit. Canadian agriculture is reeling as exporting sections of the industry have first seen profits shrink, and then see losses mount as the foreign currencies in which their products are sold in buy fewer Canadian dollars. At the same time costs continue to increase. Sunk capital costs and stable wages are next to impossible to reduce.

To me it only makes sense that worse news is on the horizon. Even service based companies will find it difficult to compete with foreign companies at home or abroad. The 35% increase in the dollar means that Canadian companies’ costs, including salaries, have increased 35% relative to our American counterparts. At the same time it’s hard to notice any change in our standard of living.

I believe the Canadian dollar has risen too far too fast for the good of our economy. But what are our leaders saying?

Outgoing Prime Minister Paul Martin said: “We leave a country in very strong economic shape, in fact, one of the strongest of the industrial world, a country that clearly has the wind in its sails. Canadians are optimistic, with every reason to be so.” He really is out of touch; retirement will be good for him.

At least Paul Jenkins from the Bank of Canada has the dollar on his radar screen. “Large segments of the manufacturing sector, because of their exposure to growing competition from Asia and because of the higher Canadian dollar, will expand less rapidly relative to other sectors.” 100,000 job losses this year, and the industry’s “expanding less rapidly.”

A lot of the dollar’s increase is beyond anyone’s control, but the Bank of Canada can still exercise some influence through interest rates. A higher interest rate generally attracts investment into the country, strengthening the dollar. Its time for the Bank to hold the line on interest rates to stop contributing to our stronger dollar. Unfortunately the bank seems committed to hurting our economy by raising rates. On January 26 the bank raised rates by ¼% and gave a strong indication that they will do it again at their next announcement on March 7th.

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