(September 12 – 18:00 ET) – A report released today by the C.D. Howe Institute says the Bank of Canada may need to raise interest rates to prevent rising inflation. The study points out that the M1 measure of Canada’s money stock grew at an explosive 24% over the past year.
The authors of the study say M1 — which measures cash and chequing accounts, forms of money closely associated with spending — has been a reliable indicator of patterns in the economy and in inflation. They say that if the bank of Canada does not take measures to slow money growth, inflation will likely rise above the bank’s 1% to 3% target range.
William Robson, Director of Research, and Shay Aba argue that M1 deserves attention because it connects the Bank of Canada’s interest-rate policy to economic growth and inflation. When money is abundant, businesses and households raise their spending. When the economy is operating close to capacity, as it is now, this extra spending is likely to stimulate inflation.
The authors say that recent growth has pushed the M1 level too high for comfort. They call upon the Bank of Canada to rein in M1 growth to avoid feeding inflation.
-IE Staff