Crow calls for higher rates, move could bring client admiration to advisors

(February 26, 2003) Proving again why he attracts admiration or contempt but rarely indifference from observers, John Crow weighed in for raising interest rates in Canada and highlighted the good news in currency swings during a Tuesday address in Toronto.

Speaking at the Economic Club of Toronto, the former Bank of Canada governor said that higher interest rates would help fight inflation, which hit 3.9% in December — somewhat higher than the central bank’s target range of 1% to 3%.

Crow’s address came on the same day the International Monetary Fund said that Canada would have to raise rates. However, the IMF report entitled “IMF Concludes 2003 Article IV Consultation with Canada” did not suggest as much urgency as Crow telegraphed during his speech and remarked to reporters afterward. The IMF report says that “…a gradual approach to withdrawing stimulus (rock-bottom rates) seems to be consistent with the forward-looking, inflation-targeting framework.”

In recent months, the central bank has argued that while it wants to increase rates, it has hesitated because of impending hostilities between the United States and Iraq and the slowdown in the U.S. economy, factors that Crow considers less important than frequently believed in Canada. “In fact, Iraq can be quite stimulative… the implicit assumption has been that Iraq has been negative but wars in general are quite stimulative — they have to be financed,” Crow said in response to a question from Advisor.ca after his prepared speech.

Crow also pointed out that the Bank of Canada does not control all interest rates but exerts much of its influence through the overnight rate charged to banks. “Many people would think that the bank can move a whole range of interest rates up and down the grid, which is not true,” noted Crow. “There are many influences and one example is the U.S. interest rates.”

Crow went on to say that Canada has been able to partially decouple from U.S. rates due to an improved financial system and that “made in Canada” interest rates are more workable now than during his stewardship at the Bank of Canada (from 1987 to 1994), when he was contending with higher inflation, fiscal problems and a less sophisticated financial framework. “We have more room to manoeuvre than we had — we’ll never have more than [some] room to manoeuvre,” said Crow, citing American influence as an ever-present strong consideration.

Crow believes that the United States deficit adds to the need for “made in Canada” rates. “I’m concerned about fiscal policy in the States… they’re pushing the envelope in terms of what is financeable,” he said. “I’m really quite worried.”

If Crow wins the day on his call for higher interest rates, advisors who have worked to convince clients about the usefulness of laddered interest rates on their investments will look almost prescient, since the laddering approach leaves enough flexibility for picking and choosing rates and terms on fixed income products.

Recent increases in the Canadian dollar against the American dollar might be confidence builders for those worried about their retirement savings, Crow said in response to an Advisor.ca question about implications for those worried about their golden years. The increases prove that the Canadian dollar doesn’t always go down against the American dollar, he noted. A continued trend in this direction would help advisors working with would-be snowbirds who cringe at the Canadian dollar constantly going in the other direction.

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Do you agree with Crow that it’s time for interest rates to climb again? Share your opinions about this topic in the “Free for All” forum of the Talvest Town Hall on Advisor.ca.

Art Melo is a Toronto-based investment writer.

(02/26/03)