As was widely expected, the Bank of Canada announced this week that it was leaving interest rates unchanged. The Overnight Lending Rate that it targets, the rate at which commercial banks borrow from each other, remains at 1%. Canada’s central bank started increasing that rate earlier this year from a low of 0.25%. But as the economy’s growth has decelerated as 2010 has progressed, it has put the brakes on its tightening policy. 
Mark Carney, the governor of the Bank of Canada, attributed the economic slowdown to the strength of the Canadian dollar, which has worsened the country’s trade balance. Exports have fallen, while imports have risen.
Though it wouldn’t have been very diplomatic of him to point fingers at a fellow central banker, Mr. Carney can blame Ben Bernanke for much of his predicament. The US Federal Reserve Chairman’s policy of quantitative easing, now in its second incarnation with perhaps a third on the way (if his recent interview on 60 Minutes is any guide), has instigated a world-wide depreciation of the US dollar. Canada has been affected, insofar as a lower American greenback translates into higher commodity prices. Since Canada is a commodity exporter, this latter trend puts upward pressure on the loonie — hence, the decline in exports, which represents a not insignificant component of our GDP (approx. 30%) as a trading nation. It is a striking fact that the Canadian dollar began its ascent from the low 60 US cents zone in 2002. That’s not too far from the time that Alan Greenspan, backed by then Fed Vice-Chairman Ben Bernanke,  initiated the ultra-loose monetary policy that fueled the housing boom.
The good news is that a strong loonie makes it cheaper for Canadian firms to purchase capital equipment from abroad. Indeed, capital spending was one of the few bright spots of the economy. That promises to increase productivity, the key to wealth creation. As Ludwig von Mises well observed: “The increase in what is called the productivity of labor is due to the employment of better tools and machinesâ€. In this way at least – if only in this way — Bernanke may be doing us a favor.
Tags: Bank of Canada, Ben Bernanke, economics, George Bragues, Government intervention, Inflation, interest rate, Interventionism, USA
