Op-Eds
On Wednesday, the Bank of Canada increased its policy rate to 5 per cent, a level not seen since March, 2001. Citing continuing tightness in labour markets and still-firm consumer spending, the bank reasoned there is still excess demand in Canada’s economy, and that Wednesday’s rate hike was necessary to continue to bring activity in line with productive potential. But if that adjustment is already happening, this hike may turn out to be one too many.
Among the many challenges a central bank faces in a fight against high inflation is the mixed signals it gets as it hikes rates to get inflation down. In Canada, the year-over-year headline inflation rate fell to 3.4 per cent in May. However, most of that was driven by a fall in…
Steve Ambler is professor of economics, Université du Québec à Montréal and David Dodge Chair in Monetary Policy at the C.D. Howe Institute, where Jeremy Kronick is director, monetary and financial services research.
Amid conflicting signals, the Bank of Canada decided to press the brakes on the economy a little harder this week, raising the overnight target rate by 25 basis points to 4.75 per cent. And with that, the conditional pause the Bank of Canada announced in January ends. We aren’t so sure it should have.
First, the case for the hike.
The year-over-year increase in the Consumer Price Index (headline inflation), rose in April from March, from 4.3 to 4.4 per cent – the first increase in 10 months, and not…
What triggered the sharp rise in Canadian inflation in spring 2021 is still a matter of debate. And it’s a debate that matters: the relative importance of the pandemic’s disruption of supply chains, Russia’s invasion of Ukraine, “greed,” or central banks’ financing of a surge in government spending will affect our response to future events. But once inflation gets started the initial causes are less important than the process that sustains it, which is a combination, on the one hand, of rising inflation expectations and costs and, on the other, of inadequate production.
When inflation has been low and stable — say two per cent — for some time then everyone knows that everyone knows that inflation will be about two per cent and…
Last week, the Bank of Canada held its overnight rate, its benchmark policy rate, at 4.5 per cent. No surprises there. In its last announcement, the bank told us the data were consistent with their view that, with the target rate where it is, inflation would come back down to three per cent by the middle of this year. Data since have not changed governing council’s view that at present more tightening wasn’t necessary.
In fact, if anything, the major economic development over the last six weeks, the failures of Silicon Valley Bank (SVB) and Signature Bank, as well as the emergency takeover of Credit Suisse by UBS Group AG, made caution even more prudent. Furthermore, it might actually make the Bank of Canada’s fight against…
At its last interest rate setting on March 8, the Bank of Canada paused its months-long hiking campaign and left unchanged its target for the overnight interest rate at 4.5 per cent. Being on the fence can be uncomfortable in the current inflationary environment – but for the latest rate setting on Wednesday, the bank was right to remain there.
Perching on the fence is uncomfortable for many reasons. First is the long lag time between setting interest rates and seeing the result. It can take 18 months or more for changes in interest rates to affect economic activity and then inflation. The bank’s rate hikes over the past year are moving inflation in the right direction. The year-over-year rate of inflation declined in February to…
