The Bank of Canada is set to announce another big rate hike on Wednesday to curb soaring inflation amid growing criticism that the central bank’s aggressive rate hikes will cause a painful and unnecessary recession.
Economists expect the Bank of Canada to raise the overnight rate by three-quarters of a percentage point to 4% from the current rate of 3.25%. Wednesday’s rate hike will be the sixth this year, after the central bank kept the overnight rate at an all-time low of 0.25% during the pandemic through March 2022.
But the Bank of Canada’s approach is facing an increasingly violent backlash from economists, and now, a political leader.
On October 23, NDP Leader Jagmeet Singh sent a letter to Prime Minister Justin Trudeau calling on the Bank of Canada to moderate its aggressive approach to rate hikes and saying the government should do more to help Canadians weather the storm. the inflationary storm. He later added on CTV that there was “absolutely no merit to their approach.”
Jim Stanford, economist and director of the Center for Future Work, said a recession is likely if the Bank of Canada continues to act forcefully on interest rates, because if history is any guide, it is happening. whenever the central bank changes rates too quickly. .
In the early 1980s and early 1990s, drastic rate hikes by the Bank of Canada led to two painful recessions, he said.
“Is it worth having a recession to bring inflation down?” Stanford asked. “The Bank of Canada should be more gradual and targeted in its approach.
Bank of Canada Governor Tiff Macklem said the main objective was to rein in soaring inflation, which peaked at 8.1% in June before dropping to 6.9% in September , far from the Bank’s 2% inflation target.
Inflation figures for September were higher than expected and without government intervention to calm inflation, the central bank is using its most effective weapon to ensure the country does not experience runaway inflation, said David Macdonald, Senior Economist at the Canadian Center for Policy Alternatives. .
The central bank fears that if inflation is left unchecked, it could ripple through the economy in the form of higher wages, creating runaway inflation like in the 1980s when rates hit nearly 13% . Therefore, a contraction in the economy is necessary to ensure that inflation does not become a permanent fixture.
“The Bank is convincing Canadians that they’re probably going to cause a recession if they don’t cut spending and that creates this psychological effect where Canadians think they’re getting less wealthy so they decide to spend less,” Macdonald said, adding that this creates a guarantee. damage to the economy in terms of job cuts.
And people are already preparing for the impact.
Six in 10 Ontarians say they are concerned about the impact of interest rates on their financial situation and their ability to pay their debts, according to a recent poll conducted by Ipsos for MNP LTD, a professional accounting and business advisory firm. . People will start to be more careful with their spending habits as budgets get tighter, he added.
Douglas Porter, chief economist and managing director of BMO Financial Group, said the central bank is in a tough spot and needs to raise rates even if it causes an economic slowdown.
BMO has forecast the overnight rate to hit 4.25% by the end of the year, but Porter said it could rise further to fight inflation, especially after strong comments from Macklem to ensure inflation hits the 2% target.
Basic necessities such as food, energy and housing have increased dramatically during the pandemic and this is impacting households with lower incomes, he said. If this continues, the wealth gap will only widen. Although raising wages may help, if inflation continues to rise for an extended period, wage increases will not save households from the rising cost of living. Especially since workplaces are also tightening the purse strings.
Porter said it was too late to bring inflation under control without causing pain at this point. “If inflation continues to operate at current levels, it will continue to hurt workers and low-income households the most.”
However, real wages — wages adjusted for inflation — have fallen for two-thirds of Canadians over the past two years, Macdonald said. The price spike was driven by the housing market, supply chain issues and geopolitical unrest in Europe.
That means there are alternatives to rein in inflation without raising rates further, Stanford said.
Limiting the amount of credits or loans in the housing sector, which has exploded during the pandemic, would help bring inflation down. In Toronto, home prices rose 40% as it became easier for buyers to borrow from lenders due to low interest rates. More investment in affordable housing and enforcement of rent controls are also helping to slow inflation, he said.
The federal government can also tax corporations more – which have benefited from inflation – to help workers and low-income households who have felt the harsh impact of soaring costs, Stanford added. The government also has the power to spend more when the economy is weak and less when the economy is strong, and should use those taxing powers responsibly, he said.
Macdonald also pointed to Canada’s Competition Bureau investigation of the grocery industry to examine soaring food prices as a necessary step in tackling inflation.
“Canada is ahead of so many G7 countries when it comes to rising interest rates, we don’t need to win this race,” Stanford said. “If we think Canadians have too much money in their pockets, that’s not the right approach. There are many other factors at play that drive inflation that need to be targeted. Mass economic pain is unnecessary.
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