Op-Eds

On Wednesday, the Bank of Canada left its target for the overnight rate at 0.25 per cent, and kept its purchases of Government of Canada bonds at $3-billion per week. Forecasters and financial market participants expected these announcements, and took them in stride. Below the calm surface, though, a couple of key questions about Canadian monetary policy are causing concern. One is about where inflation is going. The year-over-year increase in the consumer price index (CPI) hit 3.4 per cent in April, its highest reading in a decade, and above the 1- to 3 -per-cent acceptable range the central bank has for its 2-per-cent target. The bank’s statement on Wednesday emphasized that such above-target CPI increases are temporary. When demand...
En matière d’inflation, il se peut qu’à force de crier au loup, la bête surgisse pour de vrai. Il suffit que tout le monde y croie et se comporte comme tel, pour que l’inflation apparaisse. A contrario, si tous les agents économiques pensent que l’inflation restera en moyenne à 2 %, il y a de bonnes chances que cette conviction s’autoréalise. D’où, pour une banque centrale, l’importance névralgique de l’ancrage des anticipations. J’exagère un peu, mais pas tellement. De fait, l’économie est toujours balayée par des vents contraires qui poussent l’inflation à la hausse ou à la baisse. Mais si les anticipations sont bien arrimées, la banque centrale n’aura pas à beaucoup changer son taux directeur pour que les comportements s...
Last week, the Bank of Canada announced it was lowering its purchases of federal government debt from at least $4 billion a week to $3 billion a week. The Bank presented this change as a response to positive economic news that, it noted, could also lead to an increase in its target for the overnight rate of interest in the second half of 2022, earlier than it had previously discussed. But with the Bank projecting economic growth of 6.5 per cent for 2021 and inflation above target at the end of the projection period, the question has to be asked: why is the Bank still buying any of the government’s debt? When it started buying bonds as part of its quantitative easing (QE) program last year, the Bank was concerned about...
The massive increase in government spending in Canada and around the world in response to the COVID-19 pandemic has been accompanied by a siren song in the form of a new economic theory: “Modern Monetary Theory,” or MMT for short. But as we begin to emerge from the acute phase of the pandemic we need to turn a deaf ear to that song. Now that inflation concerns are beginning to stir it is hard to imagine governments raising taxes or cutting spending anytime soon to keep inflation in check — yet that’s how MMT advocates would control inflation, with what traditionally have been regarded as fiscal policies rather than the customary monetary tools of interest rates and liquidity measures. As I point out with my co-author, Farah Omran, in a...
On March 23, the Bank of Canada announced the upcoming suspension of some of its major asset-purchase programs. This is good news. Financial stresses at the beginning of the pandemic a year ago led the bank to buy the debt of provincial governments and private companies. Those stresses are now in the past and Canadians should welcome the bank’s retreat from a role fraught with economic and political risks. The programs covered by the announcement include the Commercial Paper Purchase Program, the Provincial Bond Purchase Program, and the Corporate Bond Purchase Program. The Bank established these programs when liquidity in the markets for these securities dried up a year ago. The programs were very successful: their...