Time for the Bank of Canada to hold fire on interest rates

The Bank of Canada has raised the interest rate 10 times in 18 months. It’s the steepest rate
hiking campaign in modern history. It’s time to hold fire.
The fact is inflation has come down quite dramatically in that period from 8.1 per cent in
June of last year to 4 per cent this August. Remove mortgage interest and volatile energy costs
from the data and recent inflation is tracking at about 2.3 per cent — let’s face it, the battle is
pretty much over.
Monthly inflation might have jumped, but the economy is showing multiple signs of weakness.
The unemployment rate is rising, consumer spending has stalled, investment in new housing is
tumbling, economic growth is hovering around zero and employment indicators show an
increasing level of precarity in the labour market.
Globally, central banks tried to ease the public’s fear of recession by committing to aim for soft
landing as they began raising interest rates early last year.
The problem is central banks are notoriously bad at engineering soft landings. We wonder
if one has ever been successful. By this point in history, overdoing monetary policy should be
avoidable.
Barring further catastrophes, such as another war or climate event that causes a short-term surge
in prices, inflation will continue to ease. Even if the bank did nothing from here on, the inflation
rate is likely to hit 2 per cent by next year as the impact on mortgage payments will have largely
run its course.
From a macro perspective, a soft landing is still possible. The bank could be successful in
avoiding a recession, but on their part, it requires confidence in their actions to date, consistent
messaging and steely persistence in order to engineer that outcome.
At the micro level, the landing is anything but soft. For the multitude of
families who are paying higher interest costs or rental rates while also
trying to afford the escalating cost of food — which has soared despite the
rate hikes — economic hardship is an everyday event.
Mortgage interest costs are one of the most significant contributors to inflation right
now — meaning the Bank of Canada’s actions are actually stoking the inflation they
are trying to extinguish. Diverting household spending from groceries to interest
payments does not reduce demand for food but it does increase hunger and stress.
Borrowing costs are making it much more expensive for business and government to
build the things this country so desperately needs like affordable housing

manufacturing capacity and the equipment and facilities that will help to both solve
production logjams and decarbonize the economy.
Investment decisions are being made now that impact Canada’s future. High interest
rates are impeding Canada’s ability to achieve those goals.
Government spending and other policy prescriptions are not necessarily a barrier to
inflation relief and the government has recently come to the table promising to use all the
tools at its disposal to help rates come down quickly. The interest rate is only one
blunt tool of many that could be put into action to ease the affordability crisis while
inflation continues to fall. Instead of relying solely on the interest rate, the
government and the Bank of Canada need to work together to set the right policy mix
to make life more affordable for Canadians.
Investment in affordable housing, vigorously enforcing the Competition Act to reduce
price gouging and fully implementing universal dental and pharma care are just some
of the tools at the government’s disposal to bring prices of certain goods and services
down.
Canada’s infrastructure deficit certainly hasn’t helped on the inflation front. Spending
on business-enabling infrastructure does not only provide for a prosperous future,
but it is also a remedy for today’s clogged supply chains and related price pressures.
It is past time for the Bank of Canada to ease its rhetoric on inflation and the interest
rate. It needs to go on hold and allow other policy tools to help with the heavy lifting —
further interest rate tightening is almost sure to do more harm than good.
Source – https://www.thestar.com/opinion/contributors/time-for-bank-of-canada-to-hold-
fire-on-interest-rates/article_51d706da-1509-5d85-85ae-35948f73e253.html

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