Monetary Policy - Op Eds

The Bank of Canada’s ballooning balance sheet has received lots of attention lately. From $120 billion in early March 2020 it grew over the next 12 months to $575 billion and it still stands at $414 billion today, more than three times what it was. That happened because in response to the pandemic the Bank purchased Government of Canada bonds from commercial banks. It added the bonds to the asset side of its balance sheet and paid for them by boosting “settlement balances” — basically, the commercial banks’ bank accounts with it — on the liability side. Voilà, a ballooned balance sheet.

Three factors suggest the Bank’s larger balance sheet may be with us for a while.

First, although in response to…

On ne peut choisir une combinaison d’emploi et d’inflation, comme on mélange à sa guise l’eau chaude et l’eau froide dans sa douche. Si la Banque du Canada veut maximiser l’emploi de manière durable, elle doit d’abord maîtriser l’inflation autour de 2 %, sa mission première.

Même aux États-Unis, où la Fed a officiellement le double mandat de stabiliser les prix et de maximiser l’emploi « de manière durable », en pratique, l’objectif de l’emploi est subordonné à la lutte contre l’inflation.

Il ne s’agit pas d’une tromperie ou d’un choix idéologique, mais d’un constat empirique : sauf à court terme, on ne peut accroître l’emploi par des taux d’intérêt bas lorsque l’inflation est élevée. Cette politique…

The Bank of Canada continued its tightening cycle on Wednesday by announcing a 50-basis-point increase in its target for the overnight rate. That came as a surprise to those who expected a 75-basis point increase, but it’s still a hefty hike.

It continues the Bank’s front-loading of its rate increases, which is intended to reduce the scale of future rate hikes. In our view, this latest increase was needed – both to reduce the harm of further increases and to re-anchor inflation expectations – but now the time has come to pause and reflect.

Since the Bank’s September 7th rate boost, the consumer price index (CPI) numbers for August and September have been published. Headline inflation ticked…

The Bank of Canada continued its tightening cycle last week by announcing a 75-basis-point increase in its overnight rate target. That target is now above the top end of the Bank’s estimate of the “neutral rate” of two to three per cent. But how fast will the rate go from here?

The neutral rate is the rate the Bank thinks would be appropriate for an economy producing at full capacity, with inflation running at two percent. Most economists and market-watchers believe the overnight rate needs to go beyond neutral in order to fight inflation. Despite a one-month drop in the year-over-year increase in the CPI from 8.1 per cent in June to 7.6 per cent in July, inflation is a long way above the top end of the one-to-three per cent…

Last week’s inflation numbers for July gave those of us who analyze the outlook for prices plenty to think about. The headline inflation number, which measures the increase in prices over the last 12 months, clocked in at an unruly 7.6 per cent, while the month-to-month inflation figure came in at a much better-behaved 0.13 per cent, which works out to an annualized 1.6 per cent, which is below the Bank of Canada’s two per cent target.

The June-to-July change was mostly driven by a fall in energy prices, which may or may not be repeated and could easily be reversed if the Russo-Ukraine war or other international conditions worsen. People understand that energy prices go up and down. But the July result does underscore the…