Bank of Canada’s strategy to combat inflation may not be sufficient


Bank of Canada these days Presentation Request commercial banks to borrow from central banks Maintain overnight interest rates at 0.5% and maintain interest rates offered to those banks to maintain central bank reserves at 0.25%. Banks have also completed the Quantitative Easing (QE) program, moved into a “reinvestment” phase, purchased Canadian government bonds and matured at a significant rate of $ 4 to $ 5 billion per month. Said to replace.

In effect, banks will stop adding QE stimulus (basically printing new money and thereby expanding the country’s money supply), but at least for the foreseeable future, the big ones that have already been injected into the economy. Maintain stimulus.In fact, it’s been gradual Reduction Purchase pace of quantitative easing policy after October 2020.

Of course, inflation is a major issue that has been talked about all over the country (and in fact all over the world). Rising costs of things, from bacon to cars and apartment rents.

In the same announcement, Bank of Canada Governor Tiff McClem said measures of medium- to long-term inflation expectations were firmly anchored at the bank’s annual rate target of 2%, with moderate overall wage pressure. Said there is.

Banks expect inflation to rise to nearly 5% by the end of 2021, but will return to the bank’s 2% target by the end of 2022. McClem said banks are aiming to keep inflation under control. Quickly return inflation to the target of 2%.

But there is a problem here.

Strong forces will make the job of fighting bank inflation more difficult than McClem suggests. For example, banks see current global and domestic supply chain disruptions as a short-term phenomenon, and believe that the Canadian economy’s ability to meet aggregate demand with minimal upward pressure on prices will recover in the near future. However, these views may be overly optimistic.

First, consider the supply problem of the Canadian economy. This has partially spurred the aging of Canada’s workforce.According to most models of labor supply, Canada’s workforce growth is likely, except for an increase beyond immigration plans or a sharp rise in the labor force participation rate of older workers. Slow Over the next few decades, some models are predicting essentially zero growth.

However, an increase commensurate with labor productivity growth can offset stagnant labor growth. Also, due to the expanding use of robotics, telemedicine and other innovations, during the decade 2011-2020 (when developed countries experienced the slowest labor productivity growth in 50 years). Subsequently, the economy may be at stake in the technological renaissance.

Despite these trends, there is fierce debate among economists as to whether technological change, which is a major driver of productivity growth, continues to accelerate or whether we “run out” of our best ideas. I have.It is impossible to predict changes in technology, but there is evidence that it is becoming more common. Expensive Innovate in a wide range of industries. Moreover, the aging of the population is itself a barrier to innovation. Because the aging workforce means a shrinking cohort of individuals between the ages of 25 and 40. probably To be a successful entrepreneur.

Finally, capital investment in intellectual property products such as machinery, equipment and software continues to be another major driver of labor productivity growth.

Unfortunately, capital investment in Canada has declined in recent years, and the outlook for the future is not bright. Beyond Canada’s relatively high tax rates, regulatory pressure to switch from carbon fuels to “green” energy sources, whatever the environmental benefits, will divert financial capital from investing in traditional productivity-enhancing assets.

Post-COVID political pressure to reduce reliance on imports of “strategic” commodities such as medical devices and pharmaceuticals could further slow productivity growth by diminishing the benefits of international trade efficiency. ..

In light of these potential long-term constraints on supply, Canadian policy makers need to focus on improving Canada’s productivity performance. Relying primarily on monetary policy to restore and maintain price stability, that is, to curb inflation, will probably put an overwhelming burden on central banks.

Steven Globerman is a resident student at the Fraser Institute.

The views expressed in this article are those of the author and do not necessarily reflect the views of The Epoch Times.