Since Sept. 2010, the Bank of Canada has kept its interest rates at a fixed one percent. Experts say this policy, instituted by ex-central bank head Mark Carney, has led to one of the most stable and heightened borrowing countries in the world today.
Officials at the Organization for Economic Cooperation and Development (OECD) are now beginning to urge the Bank of Canada to start raising its rates within the next year and get it up to 2.25 percent by the end of 2015, according to a published report.
The international Paris-based organization makes the case that Canadian and other economies are stabilizing and returning to modest growth.
“However, with spare capacity narrowing by the end of 2015, monetary policy tightening may need to begin by late 2014 to avoid a buildup of inflationary pressures,” the report stated. “It is assumed in the projection that the first policy rate increase occurs in the fourth quarter of 2014 and that the rate rises steadily to 2.25 per cent by the end of 2015.”
The Canadian central bank has continually stated in its quarterly updates that the economy hasn’t been performing up to its standards and has below-target inflation, which means rates will not be hiked for quite some time. Any jump in rates will cause higher variable rates and fixed-rate mortgage costs.
Although these artificially low interest rates in the Great White North are unsustainable and inevitably hurt savers and investors, the OECD’s recommendation suggests a paucity of economic insight. Central bankers and international organizations are not the ones to decide a high or low interest rate but rather the market is the one that should be in charge of this.
The supposedly smartest men in the room do not know what the interest rate or money supply should be. Artificially low interest rates and credit expansion distort the market because then the market would invest too much in capital goods, which is part of the boom part of the business cycle. Of course, it isn’t really growth but rather a time of misinvestment and then leads to a period of an economic decline.
In the end, interest rates are determined by the consumer’s time preferences (supply and demand of capital).
This Murray N. Rothbard passage from “America’s Great Depression” makes a great point: “If businessmen are misled into thinking that less capital is available for investment than is really the case, no lasting damage in the former of wasted investments will ensue.”