Interest rate cut is good for now

GUEST EDITORIAL FROM THE CALGARY HERALD

As anyone who has had a mortgage, automobile loan or any other debt except for high-interest rate credit cards knows, the cost of borrowing has been inexpensive for an extended period of time. And it is about to become even cheaper, with the recent decision by the Bank of Canada to lower its overnight rate to three-quarters of one per cent from one per cent.

The Bank of Canada, in explaining its decision to lower rates, pointed to how the sudden, dramatic reduction in the price of a barrel of crude oil will negatively affect economic growth in Canada. The Bank now forecasts GDP growth in Canada this year of just 1.5 per cent, down from the 2.5 per cent expected for 2015 in the bank’s October estimate.

As the bank noted in its January Monetary Policy Report, the large decline in oil prices will weigh significantly on the Canadian economy. The benefit though is cheaper oil and thus cheaper gasoline prices and a modest boost to consumer spending. Also, a cheaper Canadian dollar will help other parts of Canada and their economic growth, notably Central Canada’s manufacturing sector. However, as the bank was quick to point out, the dramatic drop in oil prices and the drop in investment in Western Canada and Newfoundland will not be wholly matched by increased growth elsewhere in the country.

For much of the past decade, the Bank of Canada kept rates at near historic lows. While it did increase rates modestly in the 2006 to 2008 period, it quickly reduced the bank rate again in the midst of the last recession, down to 0.5 per cent.

The Bank of Canada, with already-lowered rates, has very few magic bullets which with to combat a weak economy in the future. With interest rates at historic lows, there is little room to lower them further if the world or Canadian economy weakens yet again.