Interest rates made in Alberta

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Wednesday, August 1, 2007 | Today's Toronto Star


As the Bank of Canada has long argued, this country can have only one monetary policy, which means one set of identical interest rates nationwide. But unfortunately, Canada lacks a uniform economy.

Indeed, a comparison of recent performance in Ontario and Alberta shows that Canada has two very different economies, one sizzling hot and the other barely lukewarm.

Last year, the Alberta economy grew by 6.8 per cent, almost 3.5 times faster than Ontario, which climbed a lacklustre 1.9 per cent. At the same time, the number of jobs in Alberta rose by 4.6 per cent, while employment in Ontario was up just 0.9 per cent. As a result, Alberta boasts a jobless rate of 3.8 per cent, well below Ontario's rate of 6.3 per cent. And when it comes to inflation, Alberta saw a rise of 5 per cent compared to less than 2 per cent in Ontario.

In light of these differences, should the Bank of Canada continue to raise interest rates to meet its stated goal of controlling inflation?

The view at Queen's Park is understandable. Complaining about the central bank's one-quarter point increase in interest rates last week, Ontario Finance Minister Greg Sorbara said higher interest rates are harming the provincial economy, especially the manufacturing section, which has shed 165,000 jobs since 2004.

Because they also put upward pressure directly on the Canadian dollar, which has increased against the U.S. dollar by nearly 45 per cent since mid-2002, higher interest rates exert a double whammy on Ontario's export-oriented manufacturing sector.

Nevertheless, the Bank of Canada has been tilting its policy over the last 18 months toward Alberta in an attempt to cool off that province's super-hot economy. But Ontario has borne the brunt of that decision.

The big question for the bank is whether it can actually effect a slowdown in Alberta with this month's one-quarter point interest rate hike or even the second one that it has hinted it will implement in September. And can it do it without further damaging Ontario?

The pace of growth in Alberta is driven by one thing only, namely the outlook for the price of oil, which is expected to keep rising. Against that picture of unending profits from oil-sands development, it is hard to imagine that either a quarter- or half-point hike in interest rates will slow oil-sands development much. For that to happen, the bank likely would have to drive up interest rates much further. That, in turn, would mean decimating what is left of Ontario's manufacturing sector.

In reality, the bank cannot significantly cut growth in Alberta. Instead, it is the Alberta government which has the means to slow the pace of oil-sands development if it wanted to do so. But Alberta is unwilling to apply any breaks to its economy, with the result that Ontario is now being made to pay through lost jobs and a weakened economy.

The Bank of Canada needs to acknowledge that fact, and stop punishing this province for the choices Alberta has made.