Interest rate cuts critical for '93. (1993 forecasts of Canada's economy)

Looking ahead to 1993 continues to be extraordinarily difficult in light of the extreme volatility in interest rates and the exchange rate since September. The key question now is: Must we abandon hope for improved economic prospects in 1993? At the Conference Board, we think not. The underlying economic forces affecting Canada haven't really changed over the past few months. What has changed is the political outlook and the increased international scrutiny we've brought upon ourselves as a result of the constitutional debate. We believe we're facing a temporary situation and that it will take six months to stabilize the currency and get interest rates back down to the levels reached this past summer.

International Views Constrain Rate Cuts

Since September, we've been battered by interest rate volatility that started in Europe and then spilled over into Canada. Reinforcing this trend was the international spotlight on our constitutional, political and fiscal problems. Even now, with the referendum behind us, we continue to be reminded that international sentiment overpowers our ability to lower interest rates.

After steady declines in interest rates since March 1992, we suddenly faced a reversal on October 1 with the setting of the 90-day T-bill rate. This was caused by the Canadian dollar falling sharply from U.S. 84 cents in August to U.S. 81 cents in September. The sharp drops started in the first two weeks of September and by month-end we had lost about U.S. 2.5 cents.

At the same time, the country was increasingly embroiled in debating the proposals of the Charlottetown Accord. Having washed our linen in public in 1989 with the Meech Lake debate, we …