[新闻]Interest rate hike: Why Stephen Poloz still sounds anxious

微博: Ottoeveryday 微信公众号: 凹凸凸成长日记 Hello everyone Welcome to Otto English I’m your today’s host, Candy Today we are going to learn some economic words by going through a recent news in Canada The news is published by Macleans on Wednesday, July 12. And it is written by Joe Castaldo. The title of the news is “Interest rate hike: Why Stephen Poloz still sounds anxious “ First, we are going to go through part of the article together. The central bank has a single mandate: control inflation. So it may seem odd to raise rates at a time when pricing pressures are largely absent. The Bank of Canada even lowered its inflation projection for 2017 to 1.6 per cent from 1.9 per cent. Poloz made two points on this topic today. First, he said the factors weighing down inflation are temporary, such as rebates from the Ontario government that have constrained consumer energy prices. Second, monetary policy can take between 18 and 24 months to fully affect inflation, so central bankers have to gauge where it’s headed in the future. The bank projects that inflation will hit two per cent again in 2019, and there is a chance it could actually overshoot. The risk is that inflation remains weak. Wages, for example, haven’t exactly been rising at a robust pace even though the labour market is picking up steam. Oil prices are projected to remain low, too. Canada is not alone in this regard. Many developed countries are dealing with low inflation even as economic indicators show signs of strength. The Bank of Canada notes that temporary factors are not the only thing keeping inflation low and that “global structural factors...may be playing a larger role than believed.” To take one example, the rise of e-commerce has increased competition in the retail sector, potentially keep pricing pressures at bay. If inflation doesn’t meet the bank’s expectations, there is a possibility that higher rates could cut off economic growth—all the more reason for Poloz to keep a watchful eye now that the bank has finally moved on rates. Stephen Polo: Stephen Poloz, the governor of the Bank of Canada, is concerned about the Bank of Canada’s decision to increase its interest rate Thesis: The pessimistic projection in inflation contributed to one of Poloz’s major concerns Inflation: Increase in price level In the paragraph, it says that Today’s inflation in Canada is too low that it is expected to raise above two percent in 2019; therefore, central banks set a high interest rate as a precaution to future’s inflation Why BOC wants a high interest rate? As interest rates increase, more people are willing to borrow money with high returns, so people spend less. This result in a decrease in consumption and shifts AE and AD curve to the left with a decrease in inflation. A question addressed here: Although the Bank of Canada wants to keep inflation low, it still targets the inflation for two percent instead of zero. Why does an economy want inflation more than zero? There are two main reasons for why a zero inflation is not favourable compared with a stable low inflation First, Japan once achieved a zero inflation in 2001 by setting the interest rate to zero to eliminate its deflation situation. Japan was under a deflation situation when it targeted a zero inflation. A deflation situation is very harmful to an economy as it discourages consumptions. People tend to save money for future lower prices products so the current consumption will fall. When the consumption falls, the AE and AD curve shifts to the left and AD curve intersects with AS curve in a new point which provides a lower GDP. A zero inflation is always unstable and very likely to become deflated in an economy. Second, inflation is necessary to generate economic growth by keeping the flow of money supply. By examining money supply and inflation rate in Nigeria, money supply is defined to have a unidirectional casualty to inflation rate that increasing inflation in Nigeria is corresponding to the amount of money supply (Olorunfemi and Adeleke, 2012). Since fiat currency has been developed, they possess purchasing power which is determined by demand of currency in the economy. Under the bank’s reserve system, it requires banks to print money and inject them to the economy for paying back the currency. As money supply increase, there is more money available to purchase goods and services. So the price level rise and the quantity of money demanded increases. Finally, GDP rises as the consumption increases with lower interest rates presence in the economy. There are again several words we need to know for understanding the above two paragraphs. interest rate: is the rate which set by the central banks to determine the amount of interest you need to pay back to money you borrowed from the bank. It is also the amount of interest you will get by depositing your money in the Bank. deflation: deflation is the opposite to inflation. So deflation means the price level is decreasing. consumption: consumption means the purchases of goods and services by households in an economy economy: economy means the whole country as an economy AE curve is the aggregated expenditure curve, which is determined by the total expenditure in an economy AD curve is the aggregated demand curve, which is determined by the AE curve when AE equals to national income National income: National income is GDP AS curve is the aggregated supply curve fiat currency is the currency authorized by government