Inflation is showing signs of slowing down. Here’s Why Interest Rates Are Rising Anyway

Anyone with influence in the Canadian economy these days is bracing for a recession, big or small.

Anyone but Bank of Canada Governor Tiff Macklem, who seems determined to crush inflation at all costs.

The federal government greases supply chains to ensure that goods can flow smoothly. He is looking closely at employment insurance to refine and modernize it. Businesses and government officials are looking for sources of investment.

And all levels of government are digging into their coffers to see how much of their inflation windfall they need to keep on hand to prop up people if hard times hit hard.

But not Macklem.

He notified this week that even if the economy shows signs of slowing and inflation may ease, he will raise rates again and again until prices stabilize.

It wasn’t just an oblique signal to the markets to trade accordingly. Just in case anyone misunderstood, the central bank issued a press release, stating in bold print: “We need to raise the interest rate further.

Here’s its rationale: Yes, there are signs of slowing inflation globally, with shipping costs falling and supply chains easing.

But in Canada, people are clamoring to buy more goods and services — especially services — than the market can supply. And so, before everyone starts to assume that high inflation is a permanent fixture, the central bank must use its influence over interest rates to make borrowing more expensive and stifle demand until she responds to the offer.

Macklem acknowledges that some Canadians are already feeling the pain, but argues that everyone will feel the pain unless more is done to stop rising consumer prices.

“We are resolute in our commitment to restore price stability,” he said.

He is aware of the many projections of a mild recession in Canada, but insists there is still “a relatively narrow path” to a soft landing.

And who knows, maybe we’ll be fine. The unemployment rate, at just 5.2%, is near a record high and, at last count, almost a million jobs were vacant.

But the value of our homes is falling, rental prices are rising, the global economy is collapsing. Job creation is stagnating, there are signs of weakness in industry and retail.

More importantly, when it comes to who has influence in the economy, it’s really hard at the moment to predict what lies ahead – whether Russia will pull back or increase in Ukraine, whether China will reopen or keep restrictions, whether it’s food and energy prices will go up or down.

Because Macklem was in Halifax when he spoke Thursday, he invoked the stoicism of Atlantic Canada, pointing out that its residents always rebuild and bounce back from a storm, and are as reliable as the Bank of Canada.

Let’s take this analogy a little further.

People in Atlantic Canada know very well that when a giant storm is heading their way, they board up the windows, bring in the patio furniture, and stock up on flashlights and canned goods. They prepare for impact.

This kind of thinking encourages reform of employment insurance at the present time. The federal government has long been committed to modernizing the system and making it more responsive to workforce fluctuations, and now there is sustained pressure from labor and business to hurry.

This is also why we are seeing pressure to address supply chain dysfunctions urgently. This week, a task force warned that Canada’s transportation systems were at a ‘breaking point’ and provided government and industry with a list of emergency solutions so we can avoid bottlenecks. bottlenecks that have caused us so much trouble over the past two years.

Ottawa has been slow to act on both fronts, but with a possible recession on our doorstep, there seems to be more will to prevent further damage. At the same time, federal officials are looking closely at how much additional tax revenue is coming in, how much should be allocated to the deficit, and how much should be available in case things go south.

And they are stepping up their appeal to foreign investors, inviting them with subsidies and arguments to set up shop here and develop the economy.

It is the policy that is tantamount to battening down the hatches.

But this is not the case with the Bank of Canada.

Macklem has spoken of the need to take bold action in the face of the economic crisis, and he has done so by raising rates faster than at any other time – a full three percentage points since March. Canada has been one of the most aggressive countries in the Western world when it comes to raising rates.

But what about taking a deep breath, looking around and seeing what happens before raising rates again?

Macklem suggests a pause would hurt the bank’s credibility with respect to the public’s inflation expectations, and it would just require further rate hikes down the road. But the bank’s credibility – like that of central banks elsewhere – is already fragile after it failed to fully appreciate ongoing inflationary forces. He took a while to move and is now making up for lost time.

A recession-causing misstep right now would only further damage that credibility.

Taking a break to assess how the rate hikes are already working wouldn’t hurt. In fact, it could save all of us unnecessary pain.

Give us some slack, Mr. Macklem. We could use it.


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Leslie M. Gill