For years, central banks around the world have been helping consumers and businesses weather economic storms. Crisis after crisis, they cut interest rates to help people get through. They printed money and bought bonds to support the markets.
This time, those same banks are actively making life more difficult.
“I’m sure this feels a bit counterintuitive,” said Bank of Canada Governor Tiff Macklem.
The Bank of Canada has raised interest rates six times since March. Rates have skyrocketed from 0.25 percent to 3.75 percent. And the bank has warned that it is not ready yet.
“We think we need to raise rates a little further,” Macklem told TBEN News in an interview this week. “How far, we’ll see.”
The bank is now raising interest rates to curb inflation, which has reached its highest level in decades. Rising interest rates are expected to slow the economy. So Canadians already struggling to keep up with the rising cost of living are now facing higher borrowing costs. And those higher borrowing costs will drive the economy down.
“We actually think growth will be close to zero in the coming quarters, until about the middle of next year,” Macklem said.
He says the slowdown in economic activity should be short and not very deep. But it will have an impact.
“[The] unemployment will rise. We’re not talking about the high unemployment rates we’ve seen in past recessions, but it’s going to rise,” he said.
‘People are frustrated’
Macklem says he understands how Canadians feel.
“People are frustrated. They feel helpless,” he said.
Canadian consumers are not the only ones frustrated. Jim Stanford, an economist and director of the Center for Future Work, says the central bank has pushed interest rates too high too quickly. Central banks around the world are looking at the current state of inflation, he said, assuming both the cause and the solution are the same as the last inflation crisis in the 1970s and 1980s.
“Policymakers at the Bank of Canada and the government and academia are, I think, overly obsessed with what happened in the 1970s. It’s like a nightmare,” Stanford said in an interview with TBEN News.
In the 1970s, real wages rose along with prices. This time real wages have fallen. Corporate profits fell in the 1970s. At present, corporate profits have risen to record levels.
“So this is the exact opposite of what we went through in the 1970s. And pulling out a 50-year-old recipe and re-applying it to today’s situation is absolutely inappropriate,” Stanford said.
He says the central bank should pause its relentless rate hikes and see if inflation really needs a boost.
Main inflation has declined. The supply chain issues are starting to settle. Global raw material costs have started to fall.
New numbers won’t slow down rate hikes: economist
The latest inflation figures will be announced on November 16.
But RBC economist Claire Fan says this latest batch of numbers won’t do much to slow interest rate hikes.
Consumer price growth in Canada likely ticked higher in October. We expect the annual rate to have increased to seven percent, up from 6.9 percent in September, but still below the recent high of 8.1 percent. in June,” Fan said in a press release. note to customers.
She says a rebound in gas and heating oil prices has fueled the surge, which should give the Bank of Canada enough reason to push interest rates further.
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“While there are signs that inflation in Canada is past its peak, it will likely take an extended period of higher interest rates and a weaker economy before price growth is fully returned to central bank target rates,” she wrote.
The RBC forecast assumes the bank will raise rates by another 25 basis points in early December, then pause to assess the impact of all those rate hikes on the economy.
But it means that anyone with a variable-rate mortgage or an equity line of credit is looking for another boost to their monthly payments.
‘We’re getting closer’
Macklem says he knows these rate hikes are making life harder for many Canadians.
“We don’t want to make it harder than it is,” he says. “But at the same time, if we don’t do enough, if we are half-hearted, Canadians will 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 early and finds that inflation is still rising, it will have to take even more aggressive measures later. If it overshoots and continues to rise once inflation falls in a sustainable way, Canadians will suffer needlessly.
The window to get this right is getting smaller and smaller.
“We do think there is a need for further increases, but we are getting closer to 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 closer.”
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 still a long way off for anyone struggling to put food on the table or pay their mortgage payments today.