The Bank of Canada (ie. the mothership of all Cdn. banks, our equivalent to “The Fed” in the u.s.) gave me a break today, just in time for Christmas: my line of credit (I’m running a business, you know!) interest rate dropped by .25%.
Here’s the dilemma the Bank of Canada faces:
1. When they lower interest rates, more people borrow.
2. When more people borrow, what do they do with the funds? Spend it, of course.
3. If lots of people have lots of dollars chasing a product, what happens? Supply/Demand = the price of the product goes up. As that starts to happen to lots of products across Canada, we experience inflation.
So David Dodge, the Governor of the Bank of Canada, is always walking that fine line. In this instance, he’s betting that we won’t suffer inflation next year – why? Because our dollar is so strong relative to the USA. That means Americans won’t be buying as much of our stuff (and driving the price up) and conversely, Canadians are starting to buy jeans and cars etc. in the States (again, forcing prices in Canada down, not up, in order to compete).
That’s it in a nutshell, as best as I can grasp it. Any actual economists reading this, feel free to correct me if I’m off base here!