EDITORIAL Interest rates must come down quickly

The time is right for Bank of Canada Governor John Crow to ease up on interest rates. Fighting inflation may have been sufficient reason to jack up rates during the past two years. Today, the threat of inflation, however, is cooling and, more important, high interest rates are cutting into Canadian exporters’ competitive position. In April and May, the year-over-year Consumer Price Index has declined. That may not be a sure sign that inflationary pressure is letting up, but it is a significant indication that the economy is slowing. The need to keep pulling the reins on the economy must come into question as a result.

Without the justification of fighting inflation, there is no defence for a policy of high rates. It is already causing widespread hardship, and worse will come unless the central bank responds quickly.

All commercial ventures are jeopardized when interest rates are high, simply because debt financing becomes all that much more difficult to carry. The increase in business and personal bankruptcies is one example of how this policy is hurting.

Mineral exporters — more than 80% of Canada’s $14-billion worth of non-fuel minerals are exported — face a double-pronged threat by the Bank of Canada’s policy.

First, mineral producers suffer the same pinch that other businesses feel when the cost of borrowed money goes up. Second, and more difficult to face, is the effect high interest levels have on exchange rates.

With Canada’s short-term interest rates running at five points higher than those in the U.S., our dollar is strengthening against the American currency. Despite the dire warnings of economic and political disaster when the Meech Lake accord failed, that kind of interest rate spread is ample incentive for lenders to accept the risk.

Mineral commodities are largely priced in U.S. funds. As the Canadian dollar strengthens, the cost of operating mines increases in comparison to the price received for the minerals produced. In short, profit margins decline and some operations have to make painful adjustments.

The case of minerals is just one example, but the effect of high interest rates — at least a high spread between interest rates in Canada and in the U.S. — has hurt our overall trade balance. And the federal government’s battle with the deficit suffers, too, because more of our tax money must go to pay the added interest on our collective debt rather than reducing the deficit.

Although there is sympathy for Crow’s efforts to keep inflationary pressures down by instituting high interest rates, and there has been a demonstrated willingness to suffer that short-term pain for long-term gain, the balance of conflicting demands on the Governor is now shifting. He must respond to the changes and adapt the policy accordingly by lowering rates quickly.

Failure to do so will only hasten and deepen the recession that seems almost upon us.