Sadly, this felt inevitable. With the pandemic’s health crisis largely under control, we are now firmly in the economic crisis portion of the ride. Inflation remains high. Job cuts are mounting. Markets are uneven, at best. The dreaded ‘R-word’ is being bandied about.
And so, expectations were high and the criticism was flying ahead of the Bank of Canada’s announcement last week that it would raise the interest rate by 50-basis points to 3.75%. This marks the sixth consecutive rate hike this year. Interestingly, the rate hike came in lower than the expected 75-basis point increase that many economists expected, seemingly giving the Bank of Canada room for a smaller, future increase if warranted.
Criticism of the inflation crisis in the lead up to the Bank of Canada’s announcement last Wednesday reached a fever pitch on Parliament Hill. Both the leaders of the CPC and NDP aired their respective grievances about how the current economic situation has been handled to-date.
Some politicians have seemingly forgotten that the Bank’s renewed mandate – that came into effect last December – reaffirmed its objective of keeping inflation low, stable and predictable. With inflation still hovering around seven per cent, the Bank of Canada has few options but to act, and try to bring inflation back within the targeted range of one to three per cent outlined in its mandate.
In practice, the government supports both the mandate of the Bank of Canada, and the ability for the Governor of the Bank of Canada to make decisions independent of the political apparatus.
Notably, however, not everyone agrees with this.
On the right, you have Pierre Poilievre, who rode his Macklem-hassling straight to a first ballot victory. Not to be outdone, and seeing the political upside, NDP Leader Jagmeet Singh got in on the fun. He claimed the Bank should have started raising rates earlier and pulled back sooner. Heck, even some Liberals joined in, raising a few eyebrows at the optics of it all. (Though other Liberals have made clear the Bank must remain free of any political interference).
These barbs are what led Finance Minister Chrystia Freeland to – not once, but twice – defend the Bank’s independence. She reminded critics that undermining Canada’s fundamental institutions — like the Bank of Canada — is highly irresponsible, not to mention ‘economically illiterate’.
Surely Mr. Poilievre, Mr. Singh and some Liberals are not suggesting Canada should imitate what we saw in the United States under former President Donald Trump. Or what we saw happen in Turkey under President Erdogan. Or what we see happening in Hungary under Prime Minister Orban. Surely, they understand that once a central bank folds, or gives off the appearance of buckling to political pressure, then it’s all downhill after that.
But to give them the benefit of the doubt, their reasons are likely purely political. One can understand the juicy upside that comes with criticizing the Bank of Canada’s apparent rush to raise rates. First, the rock-throwers know full well the Bank of Canada won’t fight back. This allows them to swing with impunity and without fear of a counterargument. Secondly, siding with voters that you want to avoid a downturn is a pretty safe place to be. And third, they might be right.
The Bank of Canada acknowledges that overdoing it on rate hikes is a risk. Herein lies the rub. Raise rates too high, and too fast and risk driving the economy into a recession. Don’t raise rates fast enough, and inflation could remain high for years to come.
The trouble with the interest rate policy is that it’s a very blunt instrument, as Canadians are finding out in an all too real way. And as is the case when using a big, blunt object, people can get hurt. Unfortunately for the loneliest man in Canada, it’s the only tool he has at his disposal.
In fairness to the Governor, it’s not like Canada is an outlier here. The European Central Bank raised rates last week. The Federal Reserve is expected to do so this week. The Bank of Canada is very much following the global trend line here. Some politicians may not like it much, but Canada is on the right track when it comes to monetary policy.
What remains is a question of credibility. And the Bank of Canada’s recent track record isn’t great. Having grossly misjudged the scope of the inflation crisis, by suggesting that inflation would be transitory, the Bank of Canada boxed itself into a corner when the economy turned. Ultimately, the Governor of the Bank of Canada and his colleagues are there to make the tough calls. They are well-trained, knowledgeable, hardworking and have access to reams of data that the public simply doesn’t have. Are they perfect? No. But, facing this crisis, if asked to bet on a lawyer, a life-long politician, or a professionally trained PhD economist with 30 years central banking experience, who would you put your money on?