Macklem in year-end interview promises to curb inflation, but not stifle recovery


Kevin Carmichael: The Governor of the Bank of Canada decided he would rather try to revive the recovery than lose price control

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Nothing short of a recession will stop the Bank of Canada from raising interest rates early in the new year, possibly as early as January 26, the day officials conclude their next round of political deliberations.


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“The aim is to bring inflation back to target in a way that does not stifle the recovery,” Governor Tiff Macklem said in a year-end interview on December 15. “This recovery is now well advanced and inflation is way above target. We are not comfortable with inflation. It is well above target.

Inflation, as measured by the Consumer Price Index (CPI), the broad measure the Bank of Canada has used to guide interest rate setting since 1991, tests five percent, a pace that uncomfortably brings up memories of what it was before the central banking profession embraced inflation targeting three decades ago.

Finance Minister Chrystia Freeland renewed the Bank of Canada’s five-year tenure on December 13, again giving Macklem clear orders to focus primarily on keeping the CPI rising at a steady pace. ‘about 2% per year.


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Two days later, Statistics Canada reported that the CPI rose 4.7 percent in November, matching October’s rise. Headline inflation has only reached this speed once since the Bank of Canada started using interest rates to calibrate price pressures. The CPI also rose 4.7 percent in February 2003. The following month, the central bank raised its key rate by a quarter of a point. It would do so again in April, raising the key rate to 3.25%.

There are similarities between now and then. In early 2003, David Dodge’s Bank of Canada feared it would lose its grip on prices. “The persistently above target inflation rates in recent months reflect not only the impact of higher than expected crude oil and natural gas prices, but also continued increases in auto insurance premiums and pressure on prices in certain sectors such as housing, food and certain services, ”the central bank said at the time while explaining its decision to increase borrowing costs. “The level of economic activity in Canada remains close to full production capacity. In these circumstances, the persistence of inflation rates above target increased the risk of rising inflation expectations. “


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Macklem also fears workers will start demanding wage increases of more than five percent, and suppliers will insist on prices that match soaring input costs. The Bank of Canada reiterated earlier this month that it believes inflation will recede in the second half of next year as supply catches up with demand. But this forecast assumes public buy-in. If they don’t, faster inflation could become a self-fulfilling prophecy.

“We think there are good reasons why (inflation) will fall in the second half of next year, and our job is really to make sure that the price increases we’ve seen don’t turn into inflation. sustainable, ”Macklem said. “The two key elements of this are to keep expectations strong and to adjust our monetary position so that we do not create a head of excess demand which would create more continuous inflation.”

The economy recovered from the COVID-19 recession faster than expected, especially those predicting a depression in March and April 2020. The reason for the relatively rapid rebound is obvious: Wealthy economies, including Canada, have deployed unprecedented amounts. fiscal and monetary stimulus during the crisis.

They probably exaggerated it, but after a precipitous pivot to austerity slowed the recovery from the Great Recession, the consensus among policymakers this time was to favor growth. Suppliers pulled out in anticipation of a significant downturn, but demand continued due to generous emergency benefits. As a result, factories fell behind, ports boomed, and commodity prices skyrocketed.

The mismatch between demand and supply has fueled inflation around the world. Central bankers assumed the equilibrium would be quickly restored, but that has so far not happened, prompting the US Federal Reserve, Bank of England and others to step up their moves. plans to increase interest rates.

  1. Bank of Canada Governor Tiff Macklem said in an interview with Financial Post Editor-in-Chief Kevin Carmichael that further supply disruptions could fuel inflation further.

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  2. The Bank of England is the first major central bank in the world to raise interest rates since the coronavirus pandemic hit the global economy.

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  3. Supply chain disruptions drive up the prices of durable goods like cars.

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Macklem started the year thinking he might try to bring the unemployment rate down to its pre-pandemic figure of around 5.5%, the lowest level in data from the 1970s. But this is no longer a goal. The new mandate the Bank of Canada received from Freeland this week encourages central bankers to seek full employment, but such a “poll” will only be taken when inflation is moderate. It’s no longer the case now.

Higher interest rates can achieve this goal, although the transition may not always be smooth. In 2003, the Bank of Canada ended up cutting interest rates almost as quickly as it had raised them. The dollar has surged, hurting exporters, while the SARS outbreak has disrupted the tourism and hospitality industries. A massive power outage in Ontario shut down the country’s biggest economic engine and wildfires raged across Western Canada. The central bank cut its key rate by a quarter of a point in July and September, bringing it back to its level at the start of the year.

“Inflation and inflation expectations have fallen faster than the bank expected,” policy makers said at the time.

It is possible that Macklem is on the verge of making a similar political error. Charles St-Arnaud, a former Bank of Canada staff member who is now chief economist at Alberta Central, believes central banks risk delaying the recovery by overreacting to things over which they have little control. affecting. But Macklem decided he would rather try to revive the recovery than lose price control.

Inflation expectations “must be ratified,” he said. “We need to get inflation back on target to keep these expectations strong.”

• Email: [email protected] | Twitter: carmichaelkevin



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