CPI Deflates Case for Rate Hike

June 22, 2012

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Today’s report that the national inflation rate fell to 1.2% in May deflates calls for higher interest rates to reduce inflation. The central bank’s core rate was 1.8%, also below the 2% target.

The other argument for an interest-rate hike was to moderate mortgage lending and the housing market. However, the federal government’s move to reign in mortgage lending through the Canada Mortgage and Housing Corporation removes the pressure for the Bank of Canada to do so through monetary policy.

An important reason to keep interest rates low is to avoid upward pressure on the Canadian dollar, which remains near parity despite recent market turmoil. The OECD’s measure of purchasing power parity suggests that the exchange rate should be around 80 US cents. An overvalued currency hurts Canadian exports and threatens our economic recovery.

Erin Weir is an economist with the United Steelworkers union and a CCPA research associate.

UPDATE (June 23): Quoted in the Regina Leader-Post and Saskatoon StarPhoenix

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