South-Westerns' Economic News Summaries
Canada’s Economy Slows, Lending Rate Increases
Topic International Trade
Key Words

Economic Growth, Hurricanes Katrina and Rita, and Interest Rates

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Reference ID: A135911095
News Story

In a generally expected move, the Canadian Central Bank raised its lending rate by one quarter of one percent, to 2.75 percent. This move came despite the efforts of some groups, including the Canadian Labor Congress, to encourage the central bank to hold off on the increase in the light of a slowing economy. Other groups wondered about the unknown impact of Hurricanes Katrina and Rita.

“The danger now is that we have a tightening of interest rates, combined with a slowing economy and a rising dollar,” said Andrew Jackson, the labor body’s chief economist. “My expectation is that growth will be slower than expected and there’s a not insignificant risk of deflation.” Mr. Jackson was obviously concerned that the rising Canadian dollar would make Canadian goods more expensive to the rest of the world, and the increase in the interest rate would further dampen domestic business and consumer spending.

Mr. Jackson’s statement is more pessimistic than the sentiments evinced by the Bank of Canada. In a statement announcing the quarter point increase, the central bank stated the expected impact of Katrina “will probably be modest, although there will be a temporary spike in consumer prices, reflecting higher prices for gasoline and heating fuels.” With Katrina’s and Rita’s potential impact on energy markets, the Conference Board of Canada cites rising energy prices as a significant factor in consumers’ loss of confidence as indicated by a recent survey. The board found the confidence index fell by 5.6 percent, to 118.3, its first significant decline in 2005.

“Perhaps people feel the peak has been reached,” said Pedro Antunes, director of economic forecasting for the Conference Board. Mr. Antunes expects Katrina and Rita to have a “very negative” impact on Canada’s economy in the third and fourth quarter, but expects a turnaround in 2006 as the demand for Canadian products increase as the rebuilding effort begins in the Gulf States.

Though uncertainty about the direction of the Canadian economy is certainly growing, Craig Wright, chief economist of the Royal Bank of Canada, said that he expects the lending rate to increase further unless the economy moves in an unexpected direction. Contributing to further uncertainty, “It’s almost as if the Bank of Canada has introduced conditional tightening,” Mr. Wright said.

Questions
1.

Discuss why the Canadian Labor Congress would not want increased interest rates with a slowing economy.

2. Why do you think the Bank of Canada sees the impact of Hurricanes Katrina and Rita to be modest?
Source Ian Austin, “Canada’s Central Bank raises Lending Rate a Quarter-Point”, The New York Times Online, September 8, 2005
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