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Mark Carney Clears Up Confusion Over Rate Policy

10 November 2012

Is he raising them? Is he lowering them? Canadians watch the actions of Bank of Canada Governor, Mark Carney, very closely; mostly, whether or not he’s going to raise or lower the overnight lending rate. But it often seems like he says one thing one announcement, only to say something different the next. One time he’ll say that he sees no reason to raise the rate, the next he says that might be the exact action that’s required. As it turns out, the flip-flopping is necessary, and Carney says that each time he’s spoken to the Canadian people, he’s been “absolutely clear.”

The trick is understanding monetary policy, such as the overnight lending rate, and the effect it has on the housing market and the overall economy.

Mark Carney took over as Governor at the BoC in 2008, just before the global financial crisis hit and the Bank of Canada started appearing daily in the headlines, mostly tied to stories about the overnight lending rate. At the time, Carney had to drop the rate in order to stimulate economic growth, and keep consumers out on the market spending. Even when there wasn’t a lot of cash to go around.

It was that policy that was largely responsible for keeping the Canadian economy afloat during the great recession. Because our borrowers were still buying houses and consuming goods, there was still enough money (here at home anyway) to protect us from outside factors.

But that was four years ago. During that time, interest rates have been raised slightly (in September 2010) to the 1% where it sits now. Mortgage rules have been tightened four times in just as many years; but still people seem confused on the interest rate, and what exactly Mark Carney is planning on doing about it.

The confusion probably comes from the fact that each time Carney speaks, he does often paint a different picture than he had in the announcement six weeks prior to. One time it’s bound to go up; the next time, he’s content leaving it where it is. Hence the outcry, the anger, and the confusion on the part of some Canadians. But in fact, as Mark Carney recently stated, he’s been “absolutely clear” about his policies each and every time he’s spoken about them. And in order to really get what he’s saying, you have to understand why the rate policy is there in the first place.

“The primary objective of monetary policy is achieving low, stable, predictable inflation,” Mark Carney said in a recent interview. “It’s something we’ve been talking about. The situation is evolving. We’re being very upfront and transparent. What we’re doing is reminding people of the role of monetary policy.”

That role is to change with the times, just as the global economy does. Whenever Mark Carney has suggested increasing interest rates, it’s been at a time when the U.S. was showing signs of recovery from the recession, and before the Euro crisis had sunk to the low point where it is today. More recently, he’s suggested that interest rates will need to remain where they are for the time-being, as the U.S. has entered another period of uncertainty, and the situation doesn’t look much better in Europe either.

So are his statements confusing? If you take them purely at surface value, and constantly see a changing tone and changing sentiments, yes they probably are. But if you take these statements into consideration with everything that’s happening in the global economy, you can see that while Carney’s decisions may waver, there’s good reason for it – because the conditions on which he bases his policies are constantly wavering.

And if he were to simply pick a stance and stick to it, no matter what else happened? Well, we’d have a scenario a lot worse than confusion. We’d have an economy that doesn’t keep pace, or work within, the global system. And then we’d be in a truly hot mess.

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