In an effort to fuel the declining economy, the Bank of Canada governor Mark Carney has cut interest rates from 4.5% to 0.5% (within 15 months). The idea is that other banks will also be influenced to change their rates, giving people more incentive and a better chance at borrowing money, as well as paying it back. Statistics Canada report indicated that Canada’s economy had shrank by 3.4%, and while lowering interest rates are supposed to stimulate the economy, there will be a slow (12 to 18 months) or very minimal effect. The decline in the last quarter of 2008 has been the biggest since the recession of 1991 and Prime Minister Stephen Harper will only comment, "the economic plan of the minister of finance has spoken very clearly about the government's views on this and our action plan to deal with it."
GDP refers to the value of goods and services produced in Canada in a given year. When the level of savings and investments equal, GDP is said to be at an equilibrium (or stable). In an economic recession, people tend to try and save money which reduces the amount of money circulating (for businesses). Without consumers spending, businesses must cut back on production or lay off workers to maintain their profit (cutting costs). This reduces the flow of money to consumers and households have a lower amount of disposable income. If people do not spend money, business investment (spending) also decreases. When there is little investment, the GDP falls. With lower interest rates, consumer spending should increase because it is sometimes necessary for people to borrow money before they spend it. With low interest rates, the cost of borrowing is little (barely anything at 0.5% interest) and the opportunity cost of not saving is also less.
In most households, spending is determined by future prices and levels of income. During a recession, future incomes are definately not secure which leads people to believe that they need to save now so they will be ready to absorb a likely job loss. With lower bank rates, consumers are only affected indirectly and only affects consumers who are willing to spend money during a recession. Consumers don't benefit right away (like they do if the PST or GST is declined) which is what they need now to reassure them that they should be spending. I think that decreasing interest rates are a good thing, especially in the long run because recessions don't go away overnight. Eventually, as the situation gets worse, people will have the ability to obtain credit and spend money.
http://toronto.ctv.ca/servlet/an/local/CTVNews/20090303/BoC_cut_090303/20090303/?hub=TorontoNewHome
2 comments:
I believe that Mark Carney is taking a step in the right direction by lowering interest rates from 4.5% to .5%. This help entice more Canadians to borrow money from banks which will help the economy. Although this is only the first step in helping Canadians through this time. I believe the federal government and the Bank of Canada have to do more if they want to accelerate Canada out of this time. I agree with Michael Ignatieff when he asked the Prime Minister to clearly state what kind of economic situation we are in right now. He says its a economic downturn one minute and says something else the next day. We need informed of our situation, not sit idly by and be ignorant of our surroundings. I hope that the economic experts are wrong in the fact that this will have minimal effect on helping our economy because this could help increase spending and stop people from being overly conservative.
It is true that without the peoples' participation in spending, the economy will continue to decline. This refers to the paradox of thrift. Due to the fact that people are afraid of the decline in the economy, they decide to save up their money. This should be the complete opposite thing to do. Instead of saving, people should be spending to generate money to businesses. Without a steady flow of money to businesses people will continue to lose their jobs. Moreover, I agree with Gordon. Mark Carney is taking a step in the right direction by lowering interest rates. Lowering interest rates will definitely change people’s spending habits. However, just lowering interest rates is not enough to revive our economy. I believe that people will start spending more if the government reduces tax to about 10%.
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