Dodge Says Canada Needs Higher Interest Rates

Former Bank of Canada Governor David Dodge said provincial and federal governments should run budget deficits to fund infrastructure projects, which would lift the economy and take pressure off the central bank to keep interest rates low.

Such investments would provide a productivity boost to a nation that will struggle as an aging population shrinks the workforce, Dodge told reporters after a speech Wednesday in Ottawa. Low interest rates aimed at boosting private investment are also leading to undesirable gains in consumer spending and housing, he said.

“We have got the balance of policy wrong, given where we know we are going,” Dodge said. “You want as a government, to do what you can to actually encourage, support the public infrastructure investment to build that capital, and you want interest rates up a bit to moderate current consumption.”

The comments run counter to Finance Minister Joe Oliver’s April 21 fiscal plan that ended seven years of deficits, and measures by Ontario and Quebec provincial governments to curb their shortfalls. Dodge didn’t comment directly on the Bank of Canada’s policy interest rate, which was cut to 0.75 percent in January as oil prices tumbled.

While bank officials have cited concern about record consumer debt loads, they also say there is no housing bubble and other agencies must take the lead on tackling any excesses.

Dodge, who was a top finance department official before leading the Bank of Canada from 2001 to 2008, said federal and provincial governments have room for deficits if used for investments such as roads or communications networks.

“The right thing to do is to run cash deficits and perhaps of a considerable magnitude,” he said. “The better balance would be for government to do more on its side, and allow us to not have this distortion of asset prices that we get from this extraordinarily low interest-rate environment.”

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