Is the Bank of Canada making things worse?

Canadian households are reeling from what the Bank of Canada calls the fastest rate hike in the country’s history. The central bank says those increases will cause pain but are necessary to keep inflation in check.

Not everyone agrees.

“I don’t think these latest increases were helpful,” Jim Stanford, an economist and director of the nonpartisan research institute Center for Future Work, told CBC News. “And I don’t think they will work.”

The Bank of Canada began raising interest rates in March 2022. At the time, the main overnight interest rate was 0.25 percent. In June of that year, year-on-year inflation peaked at 8.1 percent.

Since then, the consumer price index (CPI) has slowed sharply and rates have increased tenfold. The benchmark interest rate of the bank is now at five percent. The latest CPI came in at an annual rate of 3.4 percent.

The next set of inflation data comes in next week, and early forecasts show it could fall to 3.1 percent.

And yet the central bank says that interest rates must be raised.

“We are trying to balance the risks of too tight and too tight monetary policy,” Bank of Canada Governor Tiff Macklem said at a news conference Wednesday.

“If we don’t do enough now, we’ll probably have to do more later. If we do too much, we risk making economic conditions unnecessarily painful for everyone.”

‘Broader toolkit’ needed to fight inflation

Many economists believe that the bank has already done too much.

CIBC senior economist Andrew Grantham said in a note on July 3 that another increase would be “unnecessary at best and a mistake at worst”.

If the bank’s decision to raise rates isn’t the best option, what is?

Stanford says central banks have a limited number of tools they can use.

“I think part of our problem is that we said inflation is the job of the Bank of Canada and it is,” he said. “While we should have a broader toolkit … to address the problem, including actions that the federal government should take itself, rather than saying it’s just up to the Bank of Canada.”

Monetary policy (rate hikes and bond purchases by the Bank of Canada) and fiscal policy (spending and taxation by different levels of government) should go hand in hand.

Stanford says this inflationary crisis is different from the 1970s, 1980s, and 1990s. The current episode was fueled by supply chain disruptions during COVID-19 lockdowns, the Russian invasion of Ukraine and climate issues impacting global agriculture.

So policymakers need to think differently, he says, noting that the federal government is doing something about the increase in corporate profits.

“We’ve seen Canadian corporate profits reach their highest level on record as a percentage of GDP, because in some sectors — not all, but some sectors — companies have taken advantage of this inflation to increase profit margins,” he said.

Stanford says Australia and some European countries have capped energy prices that soared after Russia’s invasion of Ukraine in February 2022. Many Canadians may be shocked by the idea of ​​such things as price caps. But he says this country already has some price controls on milk and dairy products. Why not on other products?

“The concept isn’t as far-fetched as you think — and international experience suggests that this might have been a better way to handle the problem, rather than trying to slow down the whole economy with an interest hammer,” he said.

High food and housing costs

Armine Yalnizyan, an economist and Atkinson Fellow on the Future of Workers, says governments in Canada can do plenty of small things to ease the pressure of the cost-of-living crisis without increasing inflation.

She says many households struggle to keep up with the cost of food.

“In Canada, we are the only country in the advanced economic world that does not have a national school feeding program,” she told the CBC podcast. Front burner.

Yalnizyan says there are different food programs from province to province, but there is no single national program to ensure that no child goes hungry.

“We expected something to happen since food prices went up, and until now crickets. So that’s definitely something that can be done immediately,” she said.

Housing is also important.

Mike Moffatt, an economist and senior director of the University of Ottawa’s Smart Prosperity Institute, says there are a range of measures governments can take to address housing affordability, including some direct and simple ways to incentivize developers to to build up the right stock.

Governments could waive the HST on purpose-built rental properties, and cities could relax strict zoning laws, Moffatt says.

Another solution to the housing crisis comes through immigration, he says: “How many electricians and plumbers are we going to bring in versus how many college professors?”

Moffatt, an assistant professor of business, economics and public policy at Western University’s Ivey Business School in London, Ontario, says his father was a sheet metal worker.

“For the past 40 years, our immigration system has been focused on bringing in guys like me, and biased against bringing in guys like my dad. And we absolutely need to turn that around,” he said.

If Canada is to build enough housing, it needs to ensure it has a skilled workforce to do so.

Moffatt says small changes in margin can add up quickly to help fight inflation. While he agrees that monetary and fiscal policy should work together, he says it’s not always as simple as it sounds.

“It’s always easier at the lower end of the business cycle,” he said.

Most people are familiar with that scenario. When the economy is in a slump, central banks cut interest rates and governments boost spending. That creates demand and allows money to flow.

LOOK | Explanation of continuing interest rate hikes:

“The challenge is doing that in reverse,” Moffatt said, “where you’re basically asking the federal government to take money out of the economy.”

Ask any economist and they’ll come up with a laundry list of actions federal, state and municipal governments could take to ease some of the pressure.

“But we’re not doing anything,” Yalnizyan said. “That’s how it is Simpsons episode, in which the character says, ‘We haven’t tried anything and we’re all out of ideas.'”