For years, central banks around the world have helped consumers and businesses weather economic storms. Crisis after crisis, they cut interest rates to help people get ahead. They printed money and bought bonds to prop up the markets.
This time, those same banks are actively making life more difficult.
“I’m sure some of this feels a bit contradictory,” Bank of Canada Governor Tiff Macklem said.
The Bank of Canada has raised interest rates six times since March. Rates have skyrocketed from 0.25% to 3.75%. And the bank has warned that it is not over yet.
“We think we still have to raise rates a little bit more,” Macklem told CBC News in an interview this week. “How far, we’ll see.”
In a wide-ranging interview, Bank of Canada Governor Tiff Macklem tells CBC’s Peter Armstrong that Canadians should expect more interest rate hikes and a mild recession is possible as the central bank continues its struggle. against inflation.
The bank is raising rates now to rein in inflation that has reached its highest level in decades. Rising rates are expected to slow the economy. So Canadians who are already struggling to keep up with the rising cost of living are now facing higher borrowing costs. And those higher borrowing costs will shrink the economy.
“In fact, we think growth will be close to zero for the next few quarters, through the middle of next year,” Macklem said.
He says that the slowdown in economic activity should be short and not very deep. But it will have an impact.
“[The] the unemployment rate is going to go up. We’re not talking about the high unemployment rates that we’ve seen in past recessions, but it’s going to go up,” he said.
‘People are frustrated’
Macklem says he understands how Canadians feel.
“People are frustrated. They feel powerless,” he said.
Canadian consumers aren’t the only ones who are frustrated. Jim Stanford, an economist and director of the Center for Future Work, says the central bank has raised rates too fast. Central banks around the world are looking at the current state of inflation, he said, and assuming that both the cause and the solution are the same as the last inflation crisis of the 1970s and 1980s.
“I think policymakers at the Bank of Canada and government and academia are overly fixated on what happened in the 1970s. It’s like a nightmare,” Stanford said in an interview with CBC News.
In the 1970s, real wages rose along with prices. This time, real wages have fallen. In the 1970s, corporate profits were falling. Right now, corporate profits have risen to record levels.
“So this is the exact opposite of what we experienced in the 1970s. And to take a 50-year-old recipe and apply it again to the current situation is absolutely inappropriate,” Stanford said.
He says the central bank should stop its relentless rate hikes and see if inflation really needs a bigger boost.
Headline inflation has slowed. Supply chain problems are beginning to be resolved. Global raw material costs have started to fall.
New figures won’t stop rate hikes: economist
The latest inflation figures will be published on November 16.
But RBC economist Claire Fan says this latest batch of numbers won’t do much to curb rate hikes.
“Canada’s consumer price growth is likely to have picked up in October. We expect the annual rate to have risen to seven percent, up from 6.9 percent in September, but still below the recent peak of 8, 1 percent in June,” Fan said in a statement. note to customers.
She says a resurgence in gasoline and fuel oil prices was driving the increase, which should give the Bank of Canada enough reason to keep raising rates.
- How has inflation and the high cost of living affected you? Tell us your story in an email to ask@cbc.ca or join us live in the comments below.
“While there are signs that inflation has peaked in Canada, a sustained period of higher interest rates and a weaker economy is likely to be required for price growth to fully subside at rates.” objective of the central bank,” he wrote.
RBC’s forecast assumes the bank will raise the rate by another 25 basis points in early December and then pause to assess the impact all those rate hikes have had on the economy.
But it does mean that anyone with an adjustable-rate mortgage or home equity line of credit is looking for another bump in their monthly payments.
‘We’re getting close’
Macklem says he knows these rate increases are making life difficult for many Canadians.
“We don’t want to make this more difficult than it has to be,” he said. “But at the same time, if we don’t do enough, if we don’t have a lot of enthusiasm, Canadians are going to have to continue to put up with the high inflation that hurts them every day.”
And that’s the risk here, analysts say. If the bank pauses too soon and finds that inflation continues to rise, it will have to take even more aggressive action in the future. If it goes overboard and continues to rise once inflation is declining sustainably, then Canadians will suffer unnecessarily.
The window to get this right is getting smaller.
“We think there is a need for further increases, but we are nearing the end of this tightening cycle. I can’t tell you exactly what that is,” Macklem said.
“We’re not there yet. But we’re getting close.”
The good news is that Macklem thinks we should be in a much better place by the middle of next year. The bad news is that the middle of next year is a long way off for anyone struggling to put food on their table or pay their mortgage today.