With each new inflation report, the task ahead of the Bank of Canada becomes even more difficult.
The alarming rise in inflation – reaching 7.7% in May, the highest in 39 years – is pushing the central bank to respond with bigger and faster interest rate hikes. The sweet spot to complete this sinister task shrinks. The risk of being wrong – a recession – increases.
A soft landing for the economy? Of course, that’s still the dream. But as the task of reducing inflation continues to grow, it may take more luck than skill to get there. Frankly, being delicate isn’t the top priority at this point.
“The most important thing is to get inflation back to target,” Bank of Canada Senior Deputy Governor Carolyn Rogers said at a Globe and Mail event hours after the report was released. inflation. “Of course, we want to do it with as few unintended consequences as possible. … That’s what we’re looking to do, that’s why we’re raising tariffs. That’s why we’re doing it quickly.
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This May inflation report, released Wednesday by Statistics Canada, likely cemented a rate hike of 75 basis points (three-quarters of a percentage point) by the Bank of Canada in its next interest rate decision. mid-July – what would be the bank’s biggest single rate hike since 1998.
Frankly, you could make a compelling case for even more, given the situation and timing.
The central bank has repeatedly stated that it wants to quickly raise its policy rate at least to levels it considers “neutral”, i.e. where its rate does not stimulate or inhibit growth. ‘economic activity. He estimates that the neutral rate is between 2 and 3%. A 75 basis point hike in July would put the rate at 2.25%, still at the bottom of the neutral range.
Although the odds of a full percentage point hike in July don’t seem high at this point, the Bank of Canada has good reason to seriously consider this option. Such a hike would put the bank right in the middle of its neutral range, which at least reaches the first leg of the bank’s rate intentions. He can say he withdrew his stimulus rates, before going into summer mode after July’s rate decision – a long period of relative public silence that lasts until the next rate decision after the July holiday. Work.
The US Federal Reserve is also expected to set its benchmark rate two weeks after the Bank of Canada announcement in July and looks set to make its own jump to 2.5%. The Bank of Canada may want to preemptively follow the pace of its US neighbor before checking for the summer.
Whatever the amount, it is increasingly clear that simply returning to neutral rates will not be enough. The bank will need more restrictive interest rates if it is to apply serious restraints to domestic demand, which is far too far ahead of its ability to supply it. Ultimately, the bank has to slow down the economy.
It should be possible, at least arithmetically, to do this without triggering the kind of jobs crisis that characterizes any real recession. As Statistics Canada reported this week, Canada had almost a million job vacancies in the first quarter, at a time when unemployment was at a 50-year low, evidence of a huge gap between supply and labor demand. Bank of Canada officials said that leaves plenty of room to dampen demand – like a million jobs – before it begins to significantly hurt employment.
“We see a way to do it. Our view is that we can remove some of the excess demand from the economy and bring it back into balance,” Ms Rogers said.
But just because the numbers work doesn’t mean it’s easy to engineer such a feat. Far from there. And any central banker will tell you – it’s so well-heard it’s almost a reflex – that interest rates are a crude instrument. They are not at all suited to the delicate economic surgery that we are trying to perform here. No one can quite say how high or how fast rates need to climb to reach that sweet spot where we slam the brakes on demand without slamming our collective heads into the windshield.
If you’ve been watching this game for a few economic cycles (old guy disclosure: I have), you know from experience that by the time you hear and read the phrase “soft landing” everywhere, that possibility has almost certainly already come. to be gone. Far more often than not, that’s the wishful thinking of those who can see the ground approaching rapidly beneath them.
Also, the time for the Bank of Canada to care about softness is over. He just needs to get inflation on the ground – in any way possible – before a terrible year starts to escalate into a generational problem. Yes, things got so serious.
Hang on for impact.
The Globe and Mail
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The post Bank of Canada needs more restrictive interest rates to control runaway inflation – The Globe and Mail first appeared on Canada News Media.
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