Bank of Canada is “preparing to act stronger” to combat inflation amid growing criticism


News analysis

Ottawa — Canada’s economy is in the midst of a rapidly rising interest rate environment. The Bank of Canada While criticizing the current plight, he faces an attempt to extinguish the hell of inflation in a bright red economy.

At the second consecutive meeting on June 1, the BoC raised the policy rate from 1% to 1.5% by 50 basis points. It was widely expected to raise 50 basis points (basis points are 1/100 percent points).

“The Board continues to determine that interest rates need to be raised further … if necessary to meet its commitment to reach the 2% inflation target,” the BoC’s June 1 statement said. Ready to act stronger. “

Bank of Canada and its governor, Tiff McClem, have been criticized by conservative leader candidate Pierre Poirievre and economists, given that inflation is above the upper limit of the target range of 3%. I have received it. April 2021..

Vivek Dehejia, an associate professor of economics and philosophy at Carlton University, says one point for central banks is that they are not complacent.He was saying, above all last fall That inflation will be a problem while the BoC is waiting and watching.

“There is this kind of invincible and invincible aura, and the central bank knows it all, and it’s not wrong at all, so I think a little more humility is really welcomed,” Dehezia said of the Epoch Times. Told to.

“There will be a lot of uncertainty for individuals, perhaps those who are willing to take out a mortgage, and for companies that want to borrow for investment purposes.”

Dehejia added that helping the general public and investors improve their plans is to provide better guidance on the BoC’s interest rate targets and the expected pace of increase.

“I think it would really help if there was clearer forward guidance from the banks. [U.S. Federal Reserve]For example, it’s clearer about the number of rate hikes and where they’re going, “Dehesia said.

Philip Cross, Senior Fellow of the Macdonald-Laurier Institute, said in an interview on May 31st: BNN Bloomberg Economists do not have a good model of inflation. It seems to be widely related to the money supply and the deficit. Both started ballooning in 2020.

“I think the central banks were very wary of rising inflation. Instead, when inflation first rose in 2021, they dismissed it as temporary. Then they rejected it. “Oh, this is due to supply shock and it will be gone,” he says.

Mr. Cross added that the BoC is not the only central bank in question, as major central banks are coordinating policies.

“If the Bank of Canada has a policy that is radically different from the Federal Reserve Board, it will have a significant impact on our exchange rates, so monetary policy has been adjusted. The mistakes made in Canada , Violated elsewhere, especially by the British Central Bank of the United States. “

Overheated economy

“The economy is clearly operating in excess demand,” the Bank of Canada said.

Consumer price inflation is “likely likely to rise further in the short term before it begins to ease,” he added. April’s annual inflation rate 6.8 percent— The best since the early 1990s.

The annual economic growth rate for the first quarter was 3.1%, well above the bank’s April estimate of a potential economic growth rate of 1.7% in 2022. 5.2% April is the lowest ever.

According to TD Securities, after its release on May 31, “the background of this policy still requires aggressive rate hikes in June and July.” March GDP..

The RBC pointed out that rising interest rates have already cooled housing demand and questioned whether interest rates need to rise beyond the neutral range in order to bring inflation back into control.

BoC in April neutral As Macklem explained, interest rates that “do not stimulate or weigh the economy” range from 2% to 3%.

Despite questions about BoC’s credibility in the fight against inflation, Mr. Cross says he believes the central bank is working on a goal to reduce inflation to 2% of its target.

“But every month they pass, they’re behind the ball, you’re worried, and more and more inflation will be embedded in expectations, especially wages, and then it’s very difficult to squeeze out of the system. We saw it in the 1970s, “he said.

The CD Howe Institute’s Monetary Policy Council said rising inflation “has consistently exceeded expectations for several months, including Bank of Canada’s forecasts,” to negative financial market sentiment and weak overseas growth. Nonetheless, “the growing US economy and the strength of Canada’s domestic demand mean that spending will remain at or above capacity for the foreseeable future, requiring higher short-term interest rates to lower inflation. did.”

Dehesia warns of the issue of future inflation expectations taking hold.

“The real danger, the real problem, comes when inflation expectations are open to the public. In the public opinion, if everyone expects inflation to be high, it’s burned into wage contracts and pricing, and this wage. And because of the price spiral, it automatically rises. It’s a kind of vicious circle, “he said.

Central banks are also continuing a policy called “quantitative monetary tightening,” allowing the government bond portfolio to shrink as it matures, allowing the amount of economic stimulus to gradually diminish. As of the end of April, the Bank of Canada held over $ 417 billion in government bonds.

Banks have previously stated that they will not actually sell bonds, putting further upward pressure on long-term interest rates and further slowing the economy.

“It’s a delicate balance between tightening monetary policy to cool inflation, but there’s no risk of a recession in the economy,” Dehesia said, adding that there is no formula to get it right.

The Bank of Canada’s next quarterly forecast will be announced on July 13.

Rahul Vaidyanath

follow

Rahul Vaidyanath is a journalist in The Epoch Times of Ottawa. His areas of expertise include economics, financial markets, China, national defense and security. He has worked at the Bank of Canada, Canada Mortgage and Housing Corp., and investment banks in Toronto, New York and Los Angeles.

Posted on