It has surely been a tumultuous last few weeks on the political front from the goings on down south in the United States. There is never any question that Canadians grow nervous living above the U.S. What we saw was in an assassination attempt and then a sitting American president decided not to run again. Now it looks like the current Vice President is running for President against a former President. As we careen into November, American politics is sure going to be lively. As this is the most powerful nation on earth, none of this political activity operates in a vacuum. There are usually big effects on the greater American and global economy.

We don't do politics here and for sure we don't do American politics. I'll leave that up to our American friends. However, I have had people comment to me during the last several weeks about how some remarks from American political figures is affecting their financial portfolio. That surely will continue but there was one event last week that might be a little bit more relevant to most Canadians. That's when the Bank of Canada reduced its overnight lending rate down to 4.5%.

The bank always gives some pretty consistent reasons for either raising or lowering interest rates. This time around there were many analysts expecting the Bank of Canada to have a rate cut and that is exactly what happened. According to the Bank of Canada, our economic growth picked up to 1 1/2% through the first half of the year. The Bank went on to say that with a robust population growth of 3%, the potential output of our economy is still growing faster than our GDP, which means there is some excess supply. The unemployment rate has risen to 6.4% and our inflation rate is 2.7%. All of these things plus a number of other factors let the bank take its foot off the gas.

It all makes sense to me, and I would expect further rate cuts in the future as long as the economy continues to grow at 1.2% this year, 2.1% in 2025 and 2.4% in 2026. Those growth projections come from the Bank of Canada. However, it is always important to not only look at the numbers that are coming out from the Bank of Canada. Is most important is to understand what intuitively is going on. Does this entirely make sense to you based on what the Bank of Canada said? When you walk out to your tractor in the morning, does a rate cut seem reasonable? Or does it just seem like so much mumbo jumbo?

I can understand those of you who might believe in the latter. However, good monetary policy from the Bank of Canada is very important for our economy. Combine this with fiscal policy from different levels of government and it should all make sense. Interest rates are always the hammer against inflation and after the COVID epidemic, they were used to reduce demand for capital within the economy. That's why we had successive rate rises. Now that inflation looks more under control, the bank is cutting back.

Intuitively, it all adds up. I often remember back to when I started farming and I paid 23.25% interest rates on farm loans. At the time, governments were trying to control double-digit inflation and the Bank of Canada raised rates over 20%. You might also remember how credit dried up and if you were a farmer, it was very difficult to get operating capital of any kind from any financial institution. In many ways, it got so bad that it was a precursor to the mandate of Farm Credit Canada expanding its capital products to a greater farm populace. In many ways, its farm lending now stems back to a time when farm credit dried up from a monetary policy intended to do just that.

In 2024, we are not the same place on the farm that we were in 1981. However, interest rates have the same effect, and the cut in interest rates last week should help farmers who need to borrow money to enhance farm assets. It will also help on the grain front. It's no secret that as the cost of interest rates rose during the last several months, the cost of carrying grain in storage increased as well. We were so bullish grains through that period, that it was easy not to notice. However, in this current bearish grain price environment, any break in interest rates represents a reduced cost of holding grain.

The key in that statement, of course, is about our current bearish grain price environment. This year there have been few opportunities to sell grain at higher prices except for maybe New Year's Eve. Clearly, for unpriced new crop grain come this fall, there is a carrying cost to try to capture future opportunities ahead whether you own your own storage facilities or you pay elevator storage. Costs are costs. Despite the interest rate cut, there are interest costs associated within that no producer should disregard.

This year that puts us between a rock and a hard place. One caveat: I think it's likely the Bank of Canada will keep reducing interest rates entering 2025. That should make it easier. However, it never feels that way. As we move ahead, there is just so much more to think about.

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Philip Shaw can be reached at philip@philipshaw.ca

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