Is the Bank of Canada making things worse?
CBC
Canadian households are reeling after what the Bank of Canada calls the fastest series of interest rate hikes in this country's history. The central bank says those hikes will cause pain but are necessary to rein in inflation.
Not everyone agrees.
"I don't think these latest increases were helpful," Jim Stanford, economist and director of the non-partisan research institute Centre for Future Work, told CBC News. "And I don't think they will work."
The Bank of Canada started boosting rates in March 2022. Back then, its key overnight lending rate was at 0.25 per cent. By June of that year, the year-over-year rate of inflation peaked at 8.1 per cent.
Since then, the consumer price index (CPI) has decelerated sharply and rates have gone up 10 times. The bank's key interest rate now stands at five per cent. The last CPI came in at a yearly rate of 3.4 per cent.
The next batch of inflation data will come in next week, and early forecasts show it may fall as low as 3.1 per cent.
And yet the central bank says rates must go higher.
"We are trying to balance the risks of under- and over-tightening monetary policy," Bank of Canada governor Tiff Macklem told a news conference on Wednesday.
"If we don't do enough now, we will likely have to do even more later. If we do too much, we risk making economic conditions unnecessarily painful for everybody."
Many economists have said the bank has already done too much.
CIBC senior economist Andrew Grantham said in a note on July 3 that another hike would be "at best unnecessary, and at worst a mistake."
If the bank's decision to increase rates isn't the best option, what is?
Stanford says the fact is that central banks have a limited range of tools they can use.
"I think part of our problem is that we said inflation is the Bank of Canada's job and that's it," he said. "Whereas we should be bringing a broader toolkit ... to the problem, including measures the federal government itself should take, rather than saying it's just up to the Bank of Canada."
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