27th January2016
The article talks about Canada central bank’s move to keep its interest rate unchanged despite an economic slowdown. The Bank of Canada revised down its annualized growth rate from 2% last year to 1.4% in the first half of this year. The economic slowdown can be attributed to the current decline in oil prices. The central bank’s move to maintain the lending rate at 0.5% is a move seen to encourage more lending by the banks and, as a result, increase spending rates in the country. Oil is a product that has a significant impact on Canada's economy with a direct correlation with the Canadian dollar. The lower the oil prices, the lower the value of the Canadian dollar. However, the lower value of the Canadian dollar has a bright side to it. The manufacturing sector which is primarily dependent on the exports will see an increase in the number of exports as more and more foreign importers increase their imports due to low prices compared to other countries (The Associated Press). There is a clear indication that Canada’s economy is divided into two with one benefitting from the low oil prices and the other suffering from the same.
The article relates to the topics we have discussed in class including the role the central bank has in the economy. The central bank has the task of stimulating the economy by altering the monetary policies such as those affecting the interest rates charged by the lenders. In this case, the Central Bank intends to boost the economy's growth rate by cutting down on the interest rates. Lower interest rates would result in an increase in borrowing and consequently an increase in the amount of spending in the economy. The cut on the lending rate is a clear indication that the Central bank wants to create a balance in the economy. It is quite evident that a significant cut in the lending rates would have bolstered the manufacturing sector that heavily relies on exports while hurting the other sectors of the economy that rely on a high value of the Canadian dollar. Economic growth is enhanced by an increase in spending which results in an increase in the demand for goods and services (The Associated Press). However, the central bank does not want to increase spending to a level that the economy cannot sustain the increase in the aggregate demand resulting in increased inflation. The interest rates should be kept at a level that the economy can comfortably support.
The article is a clear testament of how an economy is a complex system with economic factors having different impacts on the economy’s growth. This means that the central bank needs to conduct due diligence before coming up with new monetary policies (The Associated Press). A poorly thought through policy might have adverse effects on the economy especially in an environment where individual economies have a role to play in the global economic scene. Currently, there is uncertainty surrounding oil prices with a significant glut in the market. OPEC countries seem to have the ball in their court since they seem to control the oil prices. A collaborative approach to reducing the supply glut will surely capture the attention of the Central Bank of Canada which will see the implementation of new monetary policies.
Work Cited
The Associated Press. Canada's Central Bank Keeps Key Interest Rate Unchanged. 20 Jan. 2016. Web. 27 Jan. 2016. < http://www.nytimes.com/aponline/2016/01/20/world/ap-cn-canada-economy.html>
