Canadian households are reeling after what the Bank of Canada calls the fastest series of interest rate hikes in Canadian history. The central bank says those increases will cause pain, but are necessary to control inflation.
Not everyone agrees.
“I don’t think these latest increases have been helpful,” Jim Stanford, an economist and director of the nonpartisan Center for Future Work, told Breaking:. “And I don’t think they work.”
The Bank of Canada began raising rates in March 2022. Back then, its key overnight lending rate was 0.25 percent. In June of that year, the year-on-year inflation rate peaked at 8.1 percent.
Since then, the consumer price index (CPI) has slowed considerably and fees have increased 10-fold. The bank’s key interest rate is now five percent. The latest CPI came in at an annual rate of 3.4 percent.
The next batch of inflation data will arrive next week, and early forecasts show it may fall as low as 3.1 percent.
And yet the central bank says rates need to go higher.
“We’re trying to balance the risks of undertight and overtight monetary policy,” Bank of Canada Governor Tiff Macklem said at a news conference on Wednesday.
“If we don’t do enough now, we may have to do even more in the future. If we do too much, we risk making economic conditions unnecessarily painful for everyone.”
A “broader toolkit” is needed to fight inflation
Many economists have said that the bank has already done too much.
Andrew Grantham, CIBC Senior Economist said in a note on July 3 that another walk would be “at best unnecessary and at worst a mistake.”
If the bank’s decision to increase rates is not the best option, what is?
Stanford says the fact is that central banks have a limited range of tools they can use.
“I think part of our problem is that we said inflation is the Bank of Canada’s job and that’s it,” he said. “Whereas we should be bringing a broader set of tools… to the problem, including actions that the federal government itself should be taking, rather than just saying it’s up to the Bank of Canada.”
Monetary policy (interest rate increases and bond purchases by the Bank of Canada) and fiscal policy (spending and taxes by different levels of government) are supposed to go hand in hand.
Stanford says this inflation crisis is different from those of the 1970s, 1980s, and 1990s. The current episode was triggered by supply chain disruptions during the COVID-19 lockdowns, Russia’s invasion of Ukraine, and the climatic problems affecting world agriculture.
So policymakers need to think differently, he says, noting that the federal government should do something about the increase in corporate profits.
“We’ve seen Canadian corporate profits hit an all-time high as a percentage of GDP, because in some sectors, not all, but in some sectors, companies have taken advantage of this inflation to expand profit margins,” he said.
Stanford says Australia and some European countries have capped energy prices that skyrocketed after Russia’s invasion of Ukraine in February 2022. Many Canadians may bristle at the thought of something like price caps. But he says that this country already has some price controls on milk and dairy supplies. Why not in other products?
“The concept is not as far-fetched as you think, and international experience suggests that it might have been a better way to tackle the problem, rather than trying to slow down the whole economy with one interest rate,” he said.
High costs of food and housing.
Armine Yalnizyan, economist and Atkinson Fellow on the Future of Workers, says there are many small things that governments in Canada can do to help ease the pressures of the cost-of-living crisis without raising inflation.
She says many households have struggled to keep up with the cost of food.
“In Canada, we’re the only country in the economically advanced world that doesn’t have a national school feeding program,” he told the CBC podcast. front burner.
23:46Has the Bank of Canada gone too far?
Yalnizyan says there are different food programs from province to province, but there is no single national program to help ensure that no child goes hungry.
“We expected to see something happen since food prices skyrocketed, and so far, crickets. So that is definitely something that could be done right away,” she said.
Housing is also key.
Mike Moffatt, economist and senior director of the Institute for Smart Prosperity at the University of Ottawa, says there are a number of actions governments could take to help address housing affordability, including some immediate and simple ways to incentivize homeowners. developers to build the right stock.
Governments could waive the HST on purpose-built rentals and cities could relax strict zoning laws, Moffatt says.
Another solution to the housing crisis is through immigration, he says: “How many electricians and plumbers are we going to bring in versus how many university professors?”
Moffatt, who is an assistant professor of business, economics and public policy at Western University’s Ivey School of Business in London, Ontario, says his father was a tinsmith.
“For the last 40 years, our immigration system has been biased toward bringing in guys like me and biased against bringing in guys like my dad. And we absolutely have to change that,” he said.
If Canada wants to build enough housing, it needs to make sure it has the skilled labor to do it.
Moffatt says that small changes in the margin can quickly add up to help fight inflation. While he agrees that monetary and fiscal policy should work together, he says it’s not always as easy as it seems.
“It’s always easier at the bottom of the business cycle,” he said.
Most people are familiar with that playbook. When the economy is in the gutter, central banks cut rates and governments increase spending. That creates demand and gets money flowing.
CLOCK | Explanation of ongoing interest rate increases:
“The challenge is to do that in reverse,” Moffatt said, “where you’re basically asking the federal government to take money out of the economy.”
Ask any economist and you can rhyme with a long list of actions that the federal, provincial and municipal governments could take to relieve some of the pressure.
“But we are not doing anything,” Yalnizyan said. “It’s like that the Simpson episode, where the character says, ‘We haven’t tried anything and we have no ideas.