CANADA: Fiscal Squeeze

The price of money, like most other prices in the high-pressure Canadian economy, continued to creep upward last week. For the sixth time in 15 months, the Bank of Canada raised its rate on loans to chartered banks. The country’s basic interest rate was increased from 3¼% to 3½%,* the highest ever charged by the government-owned central bank.

Past increases in the Bank of Canada interest rate were imposed to tighten the money supply and curb inflation. The latest increase, while it will have some anti-inflationary effect, was applied primarily for another reason: to get the government out of an embarrassing fiscal squeeze. In its most recent short-term (go-day) borrowings, the government had been forced to pay an interest rate of 3.26%, a slightly higher rate than the 3.25% interest on loans made through the Bank of Canada. That situation was obviously untenable; chartered banks would have been able to borrow from the government, then lend back the government’s own funds to the treasury at a higher rate of interest. The speediest way to block such uneconomic transactions was to raise the Bank of Canada rate.

*The comparable U.S. Federal Reserve Bank rate is now 3%, up from 1¾% since May 1955.