Wednesday, September 08, 2010

Carney wrong to Raise Interest Rates

Declining GDP numbers Check
Talk of Double dip recession Check
Talk of further US Job losses Check
Canadian personal debt levels out of control Check
Talk of a housing bubble Check

There was no reason for Carney to raise interest rates.

Raising interest rates means the Canadian dollar will go up against the US dollar. Thus making are exports less competitive at time of low demand in the States. It also ultimately increases people's mortgage payments. Carney is right to be worried about Canadians being overstretched and burdened by the high cost of housing. However, demand for housing is way off last years pace. In other words, there is no housing market to cool off. Worse, raising interest rates now will only send more people over the edge and so could burst and already deflating bubble. Housing bubbles are a bad thing. Bursting a housing bubble, as opposed to slowly letting it deflate, is much much worse though.

Putting pressure on Harper to increase the requirements for taking out a mortgage is a far more effective way of preventing Canadians form taking on too much mortgage debt than increasing borrowing costs for everyone and increasing the interest charges on existing mortgages.

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