In recent times, it has come to the forefront once again as a result of the BoC’s decision to maintain its current rate. The overall consensus is that the BoC’s current rate bias is too conservative and is not in line with what many experts have suggested would be more beneficial to the Canadian economy.
The debate surrounding the BoC’s rate bias stems from the fact that the Bank is responsible for setting the overnight rate at which commercial banks borrow from each other. This rate, which is also known as the prime rate, is used as a benchmark to set interest rates for borrowers and lenders. When the BoC opts to maintain a low or consistent rate, it is seen as an indicator of an overall “neutral” stance, which is typically seen as beneficial for the economy since it encourages borrowing and spending.
However, some experts have argued that the BoC’s current rate bias is too conservative and does not reflect what is best for the economy in the long term. It is suggested that the BoC should have removed its bias from a low interest rate after the financial crisis of 2008-2009 and moved towards a more “active” stance instead. This would involve introducing short-term hikes in the overnight rate in order to encourage spending and investment in the Canadian economy. While this could potentially lead to higher interest rates for borrowers, the idea is that it would also lead to increased economic activity and growth in the long run.
Another area of contention is the timing of the BoC’s rate decision. It has been argued that the Bank should have made the decision to raise rates sooner rather than waiting for inflation to reach the 2% threshold. By waiting, it has been suggested that the BoC has contributed to a prolonged period of stagnation and low investment levels, which could have been avoided if the Bank had taken a more “proactive” approach.
Overall, it is clear that the BoC’s current rate bias is too conservative and is not in line with what many experts have suggested would be more beneficial to the Canadian economy. While the Bank has argued that it is following a “wait and see” approach, it is likely that they will eventually have to shift their stance in order to meet new economic challenges. In the meantime, the debate on whether or not the Bank’s rate decision is too conservative and too late will continue to rage, with no clear answer in sight.
Analysis:
The Bank of Canada (BoC) is responsible for setting the overnight rate or prime rate which is used as a benchmark to determine the interest rates for borrowers and lenders. Many experts are debating the Bank’s current rate bias which is too conservative and not in line with what would be beneficial to the Canadian economy. It is suggested that the BoC should have removed its bias from a low interest rate after the financial crisis of 2008-2009 and moved towards a more “active” stance instead. This would involve introducing short-term hikes in the overnight rate in order to encourage spending and investment in the Canadian economy.
The debate has also extended to the timing of the BoC’s rate decision. It has been argued that the Bank should have made the decision to raise rates sooner rather than waiting for inflation to reach the 2% threshold. By waiting, it has been suggested that the BoC has contributed to a prolonged period of stagnation and low investment levels which could have been avoided if the Bank had taken a more “proactive” approach.
The debate on whether or not the Bank’s rate decision is too conservative and too late will continue as the Bank attempts to remain neutral while also responding to new economic challenges. Some experts suggest that by adopting an active stance with short-term rate hikes, the Bank could potentially lead to higher economic activity and growth in the long run. However, others contend that introducing short-term rate hikes could lead to higher interest rates for borrowers as well as an increase in consumer debt.
Therefore, the BoC is faced with a difficult decision between increasing interest rates to spur economic activity or reducing them in order to keep interest rates low for borrowers. The Bank also must consider the current economic climate in order to make an informed decision. Ultimately, it is uncertain as to what the BoC will decide,but experts believe that the Bank may soon have to shift its stance in order to meet new economic challenges.
This article was contributed on Aug 13, 2023
