Bank of Canada right not to raise interest rates

September 6, 2002

OTTAWA--The Canadian economy has clearly been more robust than the U.S. economy this year, but is now losing momentum, so it's important that the Bank of Canada reconsider its intention to raise interest rates later this year.

This is the chief message of the CCPA's latest "State of the Economy" report, written by CCPA research associate and Canadian Association of University Teachers economist David Robinson. Highlights from the report include:

  • Stronger than expected economic growth will boost the federal surplus to $6 billion in fiscal 2002. When the final year end adjustments are made for 2001, the surplus will be near $6 billion.
  • As well as enriching the federal coffers, a stronger economy is finally putting more money in the pockets of working Canadians. Earnings have posted real improvements for the first time since 1999. Adjusted for inflation, average weekly earnings rose more than 3% between May 2001 and May 2002. Average hourly earnings also jumped by 3.6% over the same period, with the manufacturing hourly wage reaching a three-year peak. However, when adjusted for inflation, both weekly earnings still remain stubbornly below the levels recorded in 1999.
  • The Bank's decision this week to keep interest rates unchanged was the right one. The Canadian economy is clearly losing momentum, with real GDP growth in each of May and June slowing to just 0.1% after posting a gain of 0.8% in April. Meanwhile, the anticipated year-over-year inflation rate of 2% falls right in the middle of the Bank's target range. Real wage increases are in line with productivity growth and therefore pose no inflationary threat.
  • It's important the Bank reconsider its intention to raise interest rates later this year. Such rate hikes would be hard to justify. Business investment is only just recovering. At 7.6%, the unemployment rate remains well above the lows recorded in 2000 and 2001. The stock markets remain volatile and the U.S. economy continues to struggle.
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