Clarity around rate increases
“Canadians are not feeling happy.”
Bank of Canada governor Tiff Macklem offered that on-the-nose observation recently to a gathering of New Brunswick business leaders. Yet given our shared state of financial anxiety, given how Canadians are struggling to make ends meet, and given the arrival of the holiday season with its attendant pressures of shopping and gift giving, Macklem could have reached for a sharper descriptor.
Say, “miserable.” Or, “despairing.” “Wretched” has an appropriately Dickensian ring to it. Homeowners who have been hit with crippling interest cost increases on their mortgages no doubt have other words in mind.
Yet while we can poke at the governor for his delicate phrasing, the current messaging from the bank has much to commend it.
That may seem a surprising statement to readers who recall the criticisms laid in this space when the bank was too late and too slow to raise interest rates in the first place.
As the consumer price index recorded rising prices above the bank’s so-called “control range” of one to three per cent in the summer of 2021 it could be effectively argued that it was judicious to wait a month or two or even three to see if the CPI increases were a trend or an anomaly.
But then inflation delivered a three-month run above four per cent, and then a further two months above five per cent before the bank rate was finally raised by 25 basis points to .50 per cent in March, 2022. Too little, too late. Inflation hit 8.1 per cent in June of that year. Sharp interest rate increases were inevitable. The benchmark rate has been sitting at five per cent since mid-July. The upside of the current messaging? Transparency.
The decision to release deliberations by the bank’s governing council subsequent to each monetary decision invites sunlight — and provides an improved explanation — into how those decisions are reached.
The latest report makes clear what council members agree on — that food price inflation should subside as a result of lower input costs; that monetary policy has been working to slow demand and, with increasing supply, has been nudging the economy back into balance, but that inflationary risks have increased due to global tensions — and what they don’t.
It may seem disconcerting to read that some council members felt it “more likely than not” that the rate would have to be increased further to return inflation to the mandated two per cent target. Others took the view that the current five per cent rate would do the trick, “provided it was maintained at that level for long enough.”
Inflation rose 3.1 per cent year-over-year in October, good news compared with 3.8 per cent in September. But wait. May saw a year-over-year increase of 3.4 per cent, followed by a 2.8 per cent increase in June. August recorded a four per cent year-over-year increase compared with a 3.3 per cent increase in July. The swings in the rate of inflation undercut any near-term thoughts of lower interest rates.
The council’s conclusion — to hold the bank rate at five per cent and stay the course — makes sense as it awaits clear proof of a downward momentum in inflation. Macklem likes to warn that to only partially tame inflation now would pose severe risk to the economy. And yet the bank cannot be detached from the hardships higher rates are causing for Canadians, a pain that will bite even further over the coming year as mortgages come up for renewal. As to the longer term, the council remains in agreement that inflation is expected to return to two per cent sometime in 2025.
Surely the risk lies in being too concrete. Macklem was a mere month into his mandate as governor when he uttered a now famous prediction that should haunt him still. Interest rates are very low and they’re going to be low for a long time, he said in July 2020, keeping the bank rate at 0.25 per cent. He seemed to be making a salesman’s pitch. Thinking of making a big purchase? A house? A car? “You can be confident rates will be low for a long time,” he said again.
The next rate setting date is Wednesday. Canadians should be grateful for the lack of rosy predictions, and for enhanced disclosure from Macklem and his crew. That won’t ease the pain of suffering Canadians.
Toronto Star Newspapers Limited