C.D. Howe Calls For Rate Hike

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    After an extended period of record-low interest rates, the Bank of Canada should reverse some monetary stimulus and begin raising interest rates, says ‘The Dangers of an Extended Period of Low Interest Rates: Why the Bank of Canada Should Start Raising Them Now’ published by the C.D. Howe Institute. It argues there is urgency for the bank to act in view of the economic distortions and financial risks low interest rates pose for Canada. “We are building in pervasive problems for the economy,” says Paul Masson, a C.D. Howe economist. “Below-equilibrium interest rates for an extended period distort investment decisions, leading to excessive risk taking and inefficient and ultimately unprofitable investments. They also encourage the formation of asset bubbles whose collapse could lead to a recurrence of the recent financial crisis.” Interest rates in Canada and in many other countries have not been so low since the Great Depression. When taking into account inflation, short-term interest rates are negative in most developed countries, including Canada where the overnight rate currently stands at one per cent in nominal terms. Canada, however, does not face the same problems as either the United States or the EU. Its financial system was exposed to a much lesser extent to complicated sub-prime, mortgage-backed securities and its economic difficulties are nowhere near as pronounced. The downturn of output was less severe in Canada and gross domestic product has returned to a value closer to the economy’s capacity. These conditions do not justify Canadian interest rates that are so low relative to historical levels, says Masson.