Mises Wire

Canadian Interest Rates Set to Rise?

Is the Bank of Canada going to raise its overnight benchmark rate?

Since rising interest rates are decreed by the central bank, the real scarcity of capital in which major financial institutions can borrow and lend out overnight amongst themselves is unknown. Disconnected from any real savings, we expect the Bank of Canada to manually raise rates when the going gets good.

This is flawed thinking. Clearly, the rag-tag team at the BoC has confused cause and effect once again.

Through experience and logic, the idea that central banks can provide a free lunch is rebuffed by a hefty dose of reality. You need capital to have capitalism. Savings and production come before consumption. This is a priori true.

That’s why the Fed-induced casino reacted to BoC’s Number 2 Carolyn Wilkins’s recent speech. Her words were interpreted in such a way that had a discernible effect on the Canadian loonie, and it surged. 

It’s easy to imagine a financial system where this is not the case. Where “monetary policy” is returned to its rightful owner — the individual buying public.

When the No. 2 at the BoC says, “We are seeing the economy pick up,” and hints at raising rates, this means that the central bankers believe they can make everyone’s debt more expensive without bankrupting everyone in the process.

Since the economy seems to be doing well, how would a quarter-point or two fare?

Former BoC governor and now Bank of England head star Mark Carney succeeded with this back in September 2010.

America’s housing bubble had already burst, the effects were international, but the whole house of cards didn’t come crashing down. The Fed had some wiggle room, the end was near but it wasn’t set, and Canada happened to weather the storm quite nicely.

After all, we had been running federal budget surpluses since the 1990s, and we had yet to import all the finer details of the Southern real-estate easy-money craze.

With propaganda about our large “stable” banks (who have since been downgraded), there was enough global and domestic confidence for Clown Carney to nudge interest rates to 1%.

Ho, hum.

Gains were lost when his successor cut rates in 2015 due to the crash of Alberta oil.

Current BoC governor Stephen Poloz, or Simple Steve, couldn’t let that wild card spill over into other sectors of the economy. Steve told us to go back to buying land since they ain’t making any more of it. Use the low rates to pay back debts while also taking on more, he said. Grow the economy by borrowing to invest and remodel your house. Don’t look at me for the details, I just work here.

Meanwhile, Wilkins’s speech is “preparing markets” for the eventual crawl back to rate hikes.

The Bank of Canada has created a monstrosity of a monetary system. Insomuch that central banks will be around for the foreseeable future, may I suggest rediscovering some of former BoC governor James E. Coyne’s economic speeches? 

Originally posted at mises.ca. 

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