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At Issue
Interest Rates Are A Key Indicator to our Economic Future
Tuesday, June 24, 2003
Oh, the economic soup is getting thicker. Last week, I looked at Bank of Canada David Dodge and his meanderings in Montreal. It was clear then that Mr. Dodge was changing course. I was up to my knees in mud trying to get a crop in. Even in that quagmire, I couldn't ignore Dodge's second-guessing. He doesn't second-guess himself very often.It is true, that when you invite 40 economists in a room, you get at least 40 different opinions. One of the reasons I did my Masters' Degree in agricultural economics was it gave me so much latitude. I could talk about everything with authority, but almost always be off the mark. The funny thing is almost the whole populace lets us get away with that. It must be that the "dismal science" of economics confuses everybody.
Dodge is a life long bureaucrat. He has a confidence, which is admirable. That's why it's so delicious to see him miss this call. Yeah, maybe inflation isn't so much of a problem anyway. Maybe he shouldn't have hiked interest rates over the last six months. With our economy slowing, combining with SARS and BSE, it looks like Dodge and his minions missed this one.
The big clue will come on and around July 15. That's when Dodge and his cohorts at the Bank of Canada will set a bank rate. In my estimation, he'll eat some humble pie and send rates lower. Forget inflation, lower economic growth rates, BSE and SARS have become just too much to ignore. If that sends the dollar lower, so be it. It's called monetary policy by the "seat of your pants."
But of course if he thinks this will work, how many basis points should he send interest rates. With the fed poised to cut interest rates to their lowest rate ever, a few basis points won't cut it here. The spread is just too much right now to prevent the dollar from rising further. Right now, we're at 3.25%. A rate under 3% might be in our future.
Low interest rates certainly will continue to be welcome. But what is low? My first bank loan in 1981 was pegged at 23.25%. Yes, I was one of those poor souls who happened to start business when interest rates spiked to historic highs. So with the current bank rate at 3.25%, lower rates still don't hold the same resonance that they once did. In relative terms, compared to where I've come from, interest rates today are cheap.
In Chatham Kent the automotive and agricultural sectors of the local economy continue to boil. News came last week, the Navistar plant won't be closing like it was supposed to July 18th. The plant will now stay open while officials with the company and local government exhaust some last ditch possibilities to keep the plant open. With the dollar almost 20% higher than last year, it will only make that much more difficult.
Agricultural production will certainly be down in Chatham-Kent for 2003. When you combine BSE, catchy spring weather and declining commodity prices, farm revenues will continue their moribund ride after two years of drought. Even the new greenhouse industry springing up across Chatham-Kent will be threatened if the dollar continues its march upward.
At the same time, our Canadian political environment is on the cutting edge of change. Taking some clues from David Dodge, finance minister John Manley said the next Prime Minister will face much tougher economic times. It was obviously pointed toward future Prime Minister Paul Martin. Manley was musing that our federal surplus projections might have to be cut. Other analysts chimed in, saying we might go into deficit. Clearly, for our new political leaders Paul Martin, Stephen Harper, Gilles Duceppe, Peter MacKay and Jack Layton, our new economic horizon will be a challenge.
If you take anything away from my scribbling, let it be this. What we've become accustomed to in our political and economic world is swiftly changing. David Dodge knows it. Paul Martin knows it. You can also bet most Chatham-Kent autoworkers know it. But the rest of us, I'm not so sure. Next week, I hope I don't lead off with David Dodge. But with this big stuff swirling within the vortex of change, I wouldn't doubt it if I did.
Philip Shaw, farms 830 acres near Dresden, Ontario. He holds a Masters of Agricultural Economics and Business Degree from the University of Guelph and is a well-known commentator on agricultural issues in print, on radio and over satellite in Canada and the United States. In the Chatham-Kent Times, Phil will use his frank and forthright writing style to address political and economic issues from the local to the international stage. He is a keen observer of political life at all levels, reads widely and has travelled the world to gather fodder for his column. See what's At Issue this week.
