Higher interest rates could help global economy, former BoC boss says

OTTAWA — Former Bank of Canada governor David Dodge says the world economy might be better off if policy-makers bumped interest rates a little bit higher.
In prepared remarks for a speech today, Dodge says boosting borrowing costs would help promote price and financial stability under current global conditions, which include historically low interest rates and stagnant growth.
He says rate increases shouldn’t hurt employment and growth if combined with more government spending.
He acknowledges, however, that extra spending would be a “big if” with many leaders reluctant to expand public investments.
The speech to members of the C.D. Howe Institute think tank in Toronto comes less than a week before a scheduled rate announcement by Bank of Canada governor Stephen Poloz.
The Bank of Canada’s trend-setting rate sits at a paltry 0.5 per cent. Experts widely expect Poloz to leave the rate untouched, for now.
“At the present time, both price and financial stability would be better served by somewhat higher policy interest rates,” Dodge says in his speech.
Dodge, who served as central bank governor from 2001 to 2008 and is currently the think tank’s national chairman, says “ultra-low” rates have left little room for policy-makers to help cushion the blow of any future downturn.
“The capacity of policy to deal with a major negative shock going forward is extremely limited.”
There is also increasing concern that rock-bottom rates may actually be holding back growth, he adds: some workers may feel they need to save more for their retirement, thereby slowing consumption.
Low rates are also widening inequality of income and wealth within many advanced economies, Dodge added.
He stressed that monetary policy — such as moving interest rates — cannot help the global economy escape economic stagnation on its own.
Dodge says government spending has an “extraordinarily important role to play” in promoting long-term growth, especially through the expansion of public investments in productivity-boosting infrastructure.