As previously mentioned, it is believed that a cut in interest rates will make things better; because a decrease in the rates will cause either an increase in investment in the manufacturing business, more consumer spending within the country, or both, reducing unemployment and increasing AD as it is equal to the sum of consumer, investment, and government spending, and the difference between spending on imports and receipts from exports. However, BOC apparently has only one concern, which is an increase in the inflation; a cause of cutting interest rates as the AD increases. This can be illustrated in the following figure.
As can be seen in the graph, the increase in the AD caused by the cuts in the interest rate will increase the price and thus cause inflation which is the reason BOC does not want to cut the rates. Also, as mentioned in the article, the whole rise in the value went too far and too fast meaning things are not totally under control so the BOC is trying to keep its commitment in keeping “price inflation well under control” as Canada is already under some inflationary pressure at the moment.
Still, people like the president of the Canadian Labor Congress think that BOC is “too fixated on inflation” and should worry more about the economic damage from the high loonie. But the slow materialization of the retail industry adjustments’ to a higher loonie concern the governor of the bank because the faster they adjust, the quicker prices will go down, reducing some inflationary pressure and leaving less worries about inflation as when the value of the loonie goes up the prices of retail will go up as well decreasing demand so there will be a search for a new equilibrium to increase demand by decreasing prices and thus decreasing inflation. Unfortunately, the adjustment is slower than what is needed not to mention that inflation is already higher than it should be.
Furthermore, it was suggested that the governor of BOC should lower the lending rates (the interest rates offered to other banks) to increase the chance of exports getting sold in the U.S. this can be seen from a point of view where if the lending rates decrease, the qualified banks will be able to borrow more from the central bank and the borrowing and lending will be now between these banks where a borrower will gain from the lender and can use the money gained to be lent to the manufacturing industries so producing will not cost them as much and they can lower their prices making it easier for the products to be exported and sold outside the country. The relationship between a lower interest rate and loans can be seen in the figure below.
The rise in the loonie had definitely caused trouble to manufacturers who, at the end, were promised, by the government, a tax break on equipment and machinery in two years leaving the struggle of BOC unresolved.
