The Bank of Canada (BoC) has rarely been so criticized as it is today.
The Bank of Canada sets the interest rates which determine the cost of borrowing. And it pumps money into a stalled economy to get it going again, or pulls money back to keep the economy from overheating.
The bank is now being accused of botching those jobs, which are crucial in fighting inflation.
With inflation at its highest in 30 years, the search for a scapegoat may be inevitable.
The most ardent and confused of the BoC’s critics is Pierre Poilievre, a Conservative MP campaigning for the leadership of the Conservative Party.
But credible observers believe the bank waited too long to begin its current cycle of raising interest rates to tame inflation.
They also believe he damaged his credibility by not withdrawing government debt purchases sooner, which could have prevented inflation from reaching today’s high level.
“Canadian monetary policy is way behind the curve,” Scotiabank economist Derek Holt said in a March 16 client note.
Some critics of the banks have since sharpened their criticism of the Bank of Canada.
In February, this space wondered why the bank hadn’t started raising rates once inflationary signs had become abundant.
But that argument might have underestimated the impact of the Bank of Canada’s repeated warnings from last fall that higher rates were ahead.
These warnings likely caused financial markets to exert downward pressure on prices ahead of the effective rate hikes.
The bank has since raised rates, of course, and aggressively. Since March 2, it has quadrupled borrowing costs in the space of six weeks. Other important hikes will follow this year. Bank Governor Tiff Macklem has pledged to act “as forcefully as necessary” to bring inflation under control, a more overt commitment than that offered by his counterparts at the US Federal Reserve.
A bit of recent history: The Bank of Canada kept interest rates low during the pandemic. He hoped that low borrowing costs would revive the economy once pandemic restrictions began to be lifted. And he bought federal debt to fund Ottawa’s unprecedented injection of cash into Canadian households to keep them whole until the worst of the pandemic is over.
And these measures worked.
Canada’s economic recovery has been among the fastest of the world’s major economies. The country is closer to full employment than at any time in its modern history. Corporate earnings are strong and debt is low.
Moreover, the abnormally high inflation rate in Canada—6.7% in March—is less severe than the 7.8% inflation in the European Union that month. The inflation rate in the United States was even higher at 8.5%.
But in a sign of hope that inflation may have peaked, the United States announced this week that in April its inflation rate fell by 0.2%. (April figures for Canada will be released in the coming days.)
The Bank of Canada happened to lead its peers in raising interest rates. During its first two hikes, the Fed trailed the BoC by about two weeks. The Fed is now facing the same intense criticism as the BoC for its reluctance to raise rates.
Meanwhile, a European Central Bank (ECB) that has yet to raise rates now faces the same dilemma its North American counterparts had before. A North American economic recovery that still seemed fragile in the eyes of Canadian and American central bankers last winter is now very much in jeopardy in the European Union (EU).
The repercussions of the war in Ukraine extend across and beyond the EU, of course. They are putting continued upward pressure on gas prices in the GTA and on supply chains everywhere.
The impact of higher interest rates on reducing inflation is gradual, one reason critics say the cycle of raising them should have started earlier.
It’s true that over the past year central bankers and many economists in North America and Europe have misjudged just how bad inflation could get, with some calling it ‘transitional’. This judgment, in turn, was based on a mistaken assumption that global supply chains would now operate more smoothly.
“We did a lot of things right,” Macklem told the Senate Banking Committee late last month. “We got some things wrong and we’re adapting.”
But by playing a leading role in rescuing Canada’s pandemic economy, the Bank of Canada has withstood a historic test of its credibility. To ask for more is to assume that the economy is a Swiss watch that can be precisely calibrated.
Instead, we were suddenly hit last fall with a very disruptive Omicron outbreak that lasted several months.
It was at this perilous moment that many critics say the bank should have started raising rates and tried its luck to stall the economic recovery.
Monday morning quarterback can be fun, but sometimes the critics should stick to football.