Bank of Canada wary of signs of a turning point in the economy as it raises key interest rates again

As we have seen with the recent spate of climate catastrophes, the effect of a gradual increase in temperature does not necessarily have to have a gradual impact on people’s daily lives. It also doesn’t affect people equally.

Wednesday’s monetary policy report from the Bank of Canada offered a similar lesson, as the central bank warned once again that the poor and oversupplied were likely to suffer more from both the high inflation and high borrowing rates needed to sustain the economy. to reduce persistent inflation.

While he admitted that the latest quarter-point hike in key rates to five percent would hurt many people, Bank of Canada Governor Tiff Macklem warned that he remained wary of overshooting — with the possibility that the lagging effects of a long series of interest rate hikes rate hikes can start suddenly and turn the economy around.

Unnecessary pain?

“We’re trying to balance the risks of under-tightening and under-tightening,” Macklem said in response to a reporter’s question at Wednesday’s press conference in Ottawa. “If we do more than we need now, it will be unnecessarily painful.”

Repeatedly asked by reporters why a series of 10 rate hikes had not had a stronger impact on inflation, including food and housing prices, Macklem and Senior Deputy Governor Carolyn Rogers cited a number of effects, including a housing shortage, a strong labor market and the post-pandemic wave of immigration that recently pushed Canada’s population to the 40 million mark.

But the other thing that can “buffer” the effects of higher rates is forces similar to the K-shaped recovery we saw after the collapse of the COVID-19 pandemic. As we have seen with recent climate disasters, not everyone is affected in the same way.

“We deal in a lot of aggregated numbers and averages, but we know that inflation and interest rates affect people very differently,” Rogers said. “In particular, we know … that the most vulnerable Canadians are those most affected, both by inflation and by higher interest rates.”

While news stories fairly focus on the plight of the worst, a majority of Canadians remain in good shape financially, she said. And those affluent Canadians can continue to spend even as prices rise.

“There are two things that are helping protect many households from both inflation and interest rates, and that is the savings they have built up over the course of the pandemic. You can see that three-quarters of households have built up quite a bit more savings than they had prior to the pandemic,” Rogers said, citing the Monetary Policy Report (MPR)which contains many interesting graphs and charts.

“The other thing that we think is supporting confidence and shielding Canadians from some of the impacts is the strong labor market,” she said, adding that people are not afraid of losing their jobs.

Central banks have been wrong

While Macklem and Rogers emphasized that we are moving towards a slow and smooth soft landing without heading for a recession, an MPR outlook is never complete without mentioning downside risks.

“It’s ridiculous to think of a rate hike of a quarter point [on Wednesday] would make the difference between starting a recession and avoiding one,” Hilliard MacBeth, a longtime Edmonton financial analyst and author, wrote in a social media post this week.

But of course there are many examples of what we might call the last straw effect, when one last rise in rates or the last rise in global temperatures can lead to a cascade of consequences. The impossible to know in advance is when the moment has come. To be sure, both the Bank of Canada and the US Federal Reserve have mishandled sudden changes in the past.

Many economists have suggested that central banks around the world gone too far, too fast in interest rate hikes and that the well-known lagging effect of previous sharp interest rate hikes could suddenly materialise.

LOOK | Bank of Canada raises rate again and does not rule out more increases:

Bank of Canada raises interest rates to 5% and does not rule out further increases

The Bank of Canada has raised its reference rate to 5 percent as inflation and excess demand remain stubbornly high. Many Canadians with mortgages are feeling the pain, some paying double what they did a few years ago.

Canadian author Malcolm Gladwell wrote an entire book on the concept The tipping point“that magical moment when an idea, trend, or social behavior crosses a threshold, flips, and spreads like wildfire.”

In the climate context, that wording could be troubling in a year when acres burned by Canadian wildfires reached a new “magic moment.”

In the Canadian economy, there are a number of negative indicators that together can cross a threshold.

Hints of a slowdown in home sales in June could be confirmed in Friday’s latest real estate data. A sharp drop in US inflation on Wednesday, new rules to reduce the risk of mortgage renewals and this week’s announced drop in sales at Aritzia are possible signs that the economy is turning.

Growing signs of slowing down

“More missed payments on products like credit cards and car loans are a concern,” said Rebecca Oakes, vice president of advanced analytics at Equifax Canada, in a new data release last month.

The average interest rate mortgage holders pay is still well below what you would pay if you had to renew now. As each person’s renewal comes, they will have to take money from their consumer spending for debt repayment.

“The impact of the rate hikes was felt in real time in markets (especially bonds), but the real economy is only now beginning to feel the real effects of the credit channel tightening,” said Cullen Roche, a well-known US lender. manager, said in a social media post.

This week, inflation in China – a country blamed for contributing to global price increases due to the pandemic industrial shutdowns – fell to zero, while producer prices are even shrinking.

Former Governor of the Bank of Canada, Stephen Poloz, used to say to steer by looking in the rearview mirror.

On Wednesday, the current governor said that while more rate hikes may be on the horizon and there is little chance of rate cuts, he will be taking the economy one sitting at a time to prepare for the unexpected.