EDITORIAL PAGE (May 04, 1992)

Interest rates have a long way to come down yet. Eventually, despite the Bank of Canada’s reluctance to let the dollar fall, rates have to come down to a level that will support investor confidence.

For one thing, with rates at current levels, economic growth is still stagnant. It will take an overcompensation of interest rate cuts to get business back talking about capital investment. The ripple effect of a few big projects on the small business sector — the greatest employment creator — can be formidable. Stimulate capital investment and you’ll create jobs. That will revive confidence so people will spend more. That gives companies more profits to invest in further development, and the cycle goes on. Interest rates also have to come down if inflation is truly to be under control. The current spread between interest rates and inflation is far greater than it needs to be. With prime at 8% and the CPI index at 1.6%, real interest rates are no different than they were at the worst of the Trudeau years.

The battle over interest rates sometimes pivots on the conflicting interests of those who make money from loaning their capital and those who borrow capital to make money. The big players are the banks and pension funds, but the key players are individuals. Their priorities are what tip the balance from one side to the other.

When pensioners find inflation eating away at their income, politicians cannot ignore their howls of anguish. Interest rates go up so that they can earn more from the capital they lend.

But if interest rates go up too far, those who borrow capital to buy a car, to start a business or to develop mineral resources simply can’t justify the cost.

The Bank of Canada’s fight against inflation has been the correct course of action. But its effort to prop up the dollar is a misguided attempt to minimize carrying costs on the foreign portion of our national debt. Real interest rates should come down to 2 or 3%. That would be high enough to reward capital lenders, and low enough to make the fight against inflation seem worthwhile.

Lower rates would not only help stimulate the economy, they would also reduce the value of the dollar. Ultimately, that, too, would benefit the economy in the long run. A lower dollar helps our exports and mineral exports alone provide Canada with a quarter of its foreign earnings. That would create employment, reduce welfare roles and increase the tax base — all of which would help get the deficit down.

That’s preferable to some of the central bank’s current techniques such as selling our national gold holdings. That approach directly undermines the market on which rely Canadian gold mines and the 12,000 jobs they directly provide. Even if all of Canada’s entire 12 million oz. of gold holdings were dumped onto the market today, it would reduce the deficit by less than $5 billion — a drop in the bucket considering our total debt and the $30 billion deficit we run federally each year.

The inflation battle has been won, but it’s not the only strong medicine we’re going to need to get our debt under control. The next step is to let rates come down so that our dollar will seek its own level and stimulate the economy.