Monetary Policy - Op Eds

The latest data (from February) indicate that the battle against inflation is almost over. Despite the encouraging inflation data, the Bank of Canada again held its policy rate at 5 percent on Wednesday. What gives? The bank, like many other central banks, was slow off the mark to raise rates as inflation took off. We worry it runs the risk of falling behind the curve again.

First, let’s examine why the bank might be hesitating to cut – the housing market and fiscal policy. Then, let’s examine why, in our view, that’s not enough.

Year-over-year headline inflation dropped inside the bank’s 1-3 percent range in January, and continued to fall in February, sitting at 2.8 percent. Core inflation, which strips out more volatile…

Headline inflation in January moved back into the Bank of Canada’s 1- to 3-per-cent target range. Yet on Wednesday, the bank again held its target for the overnight rate at 5 per cent. 

Why is the bank reluctant to cut? There are two main impediments: core inflation, and concerns over expectations. Both are fair reasons to keep rates where they are, but both measures are easing or should ease soon. An April rate cut may therefore be in the cards.

The bank’s mandate is to target 2-per-cent headline inflation. But headline inflation contains a number of volatile items, such as energy, and so to get a sense of underlying price pressures, many central banks have measures of core inflation that strip away these components…

News that Canada’s inflation rate fell in January has prompted fresh debate about cuts in the Bank of Canada’s policy interest rate, which has been at five per cent since last July. Though the year-over-year increase in the CPI was just 2.9 per cent in January, which is getting nearer the two per cent target, many observers expect the Bank will keep interest rates where they are at its next announcement in April. Why the caution?

Partly because we’ve been here before: the CPI dropped below three per cent last spring, then sprang back up. And also because, despite January’s encouraging headline number, measures of core inflation are still well above three per cent.

There is a straightforward reason for…

The Bank of Canada again held its target for the overnight rate at 5 per cent on Wednesday, as expected.

The clamoring had begun for the bank to consider dropping rates in hopes that inflation is headed back to 2 per cent. However, the latest numbers (for December) disappointed, with headline inflation ticking back up to 3.4 per cent (from 3.1 per cent), and core measures flat or, in the case of CPI-Trim, slightly higher. On Wednesday, the bank stressed upside risks to inflation coming from greater-than-expected persistence.

However, the announcement did not mention geopolitical risks, particularly the effect of the disruption of maritime traffic in the Red Sea, its impact on shipping costs, and the knock-on effects on…

In the current debate about how to make housing affordable in Canada, there is a curious omission: the role of monetary policy, both of excessively loose monetary policy in creating the problem and of more responsible monetary policy in solving it.

The global financial crisis of 2008-09 led central banks around the world to reduce interest rates to historically low levels, which made perfect sense during the crisis, but then to keep them there for more than a decade, which sowed the seeds of the affordability crisis we are now living through. Low rates were justified in two ways: inflation was low, so they seemed appropriate or at least not harmful in their role in inflation-targeting, and banks and other lenders that…