Printer Friendly

Business and the Bank of Canada.

The case is persuasive that the Bank of Canada is justified in its currently tough monetary policy. Inflation was clearly emerging in 1990 although less so in the regions than in central Canada. Wage demands, wage settlements and tax increases have all been giving off unmistakable inflation signs.

The regional interest rate issue is straightforward. Even if the Bank of Canada wanted to, it does not have the capacity to sustain different interest rates in different parts of the country. We are all able to place our Canadian dollars on deposit anywhere we want. Faced, for example, with higher rates in Ontario than Manitoba, would most Manitoba depositors not immediately shift to Ontario? Such can be accomplished in the time it takes to hit the right few buttons on the right computer terminal. That is the end of regional monetary policy.

If interest rates are unfairly affecting given regions, the appropriate government response is targeted fiscal policy devices like subsidies. Since it is the same money that is used across a country's length and breadth, the prudent management of that money must reflect the national price trend.

The Bank of Canada is sometimes unfairly maligned yet it has done a first-rate job for Canadians in discharging its mandate of sustaining the integrity of Canadian currency.

The Bank may upset Manitoba business more than any other single federal institution. Much of the upset stems from a misunderstanding of it's responsibilities and capacities. The case is persuasive that Bank of Canada policies are consistently in Manitoba's long-run best economic interests.

Business lobbyists particularly complain about the Bank of Canada's management of interest rates. Through its actions in the money markets, the Bank of Canada plays a key role in short-term bond interest rates that flows through to consumer, mortgage and longer term bond interest rates. Many Manitobans are of the view that the Bank of Canada regularly keeps interest rates at least a point higher than they need be.

Business does not like interest rates to be any higher than absolutely necessary for three reasons: most firms fund themselves at least partly through debt, meaning that as interest rates rise, their interest obligations rise accordingly at the direct expense of earnings; all other things being equal, the Canadian dollar strengthens as interest rates rise making it more difficult for business to export products into fiercely competitive foreign markets; high interest rates tend to curb domestic demand making recession more likely and to the obvious detriment of revenues.

The effect of high interest rates on the bottom line is, of course, only part of the Manitoba complaint. Manitoba business feels that high interest rates hurt their enterprises more than they hurt comparable enterprises in central Canada. The belief that central Canadian business is more able to keep product price increases ahead of rising interest rates. It is also sometimes charged that Manitoba business carries more debt than comparable central Canadian business though this has not been particularly well documented. Suffice to say that Manitoba business feels quite strongly that monetary policy should have a regional bias.

Enter our central bank, the Bank of Canada. Almost every industrial country has a central bank and the mandate is always more or less the same: to manage the money supply so as to assure that people are always willing to use and accept money in the exchange of goods, services and work effort. Put another way, it is the central bank's job to make sure we can always trust our money.

What causes people to lose confidence in money is always inflation. The quasi-independent modem central bank owes much of its origin and traditions to the shift from gold-backed to paper-backed money. The central bank's job is to stand squarely in the way of a political, or otherwise inspired inflation-stoking monetary binge. In the old days of the gold standard, the gold convertibility requirement assured that money growth did not get unduly out of hand.

No responsible central bank can see inflation heating up and not take action to curtail it. History suggests that acquiescing to lower levels of inflation generally leads to higher levels. It is interesting that the five per cent inflation we now see as so benign inspired Richard Nixon to implement wage and price controls 20 years ago.

If inflation escalates because it is not nipped in the bud, Manitoba business will slow in a number of ways: the longer inflation escalates, the higher the interest rates needed to stop it - is the 13 per cent interest rate structure of the past year not preferable to the 20 per cent structure of 1981 when we allowed inflation to really take hold? The longer inflation goes unchecked, the greater the likelihood of serious recession, declining investment and declining stock market values; rising inflation usually leads to increasingly unstable business, capital market and social conditions making the conduct of a profitable business enterprise increasingly difficult.

John S. McCallum is a professor in the Faculty of Management of the University of Manitoba.
COPYRIGHT 1990 Manitoba Business Ltd.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1990 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:Economics
Author:McCallum, John S.
Publication:Manitoba Business
Date:Nov 1, 1990
Words:837
Previous Article:Red ink recovery: hard times are here but there are survival tactics to keep afloat.
Next Article:How a stitch in time sewed up an NHL contract.
Topics:

Terms of use | Copyright © 2017 Farlex, Inc. | Feedback | For webmasters