Bank of Canada misjudged inflation and made a rare attack from critics after sticking to strict forward guidance that prevented it from responding swiftly when prices soared and the Canadian economy began to overheat. received.
One of the world’s leading central banks, Canada’s household debt levels are much higher than other G7 countries and are more aggressive than initially expected, just as they have reached new highs. We are forced to raise interest rates and catch up.
Banks are faced with questions from politicians, economists, and even the general public about the uncertainty of the decision-making process, as the recession may be imminent, and is common among many peers. There is a growing demand for the release of the minutes, which is a practice.
As part of that, the Bank of Canada has acknowledged the failure and promises more transparency, including an analysis of inflation forecast errors scheduled for July.
But still, faced with an almost daily attack by politician Pierre Poirievre, a front runner leading the opposition Conservative Party, who regularly uses social media to accuse the central bank of being incompetent and a government puppet. doing.
Inflation in Canada reached 7.7% in May, boosted by soaring gas and food prices.
He also promised to dismiss Governor Tiff McClem if he was elected. This is a move that requires changes to the law, but still emphasizes the level of dissatisfaction.
“Is there always room for transparency? Perhaps that’s what we’re reflecting on right now,” Senior Vice Governor Carolyn Rogers told Reuters in an interview this month. “That’s what we think about.”
The Bank of Canada, which is independent in policy setting, has faced this level of political enthusiasm since the early 1990s when then-liberal opposition leader Jean Chrétien opposed Governor John Crow over a high interest rate policy. not.
Poilievre, who is not yet the leader of the opposition, is unlikely to become prime minister by 2025, when the next election is scheduled. But his attack occurs when the central bank’s public confidence in controlling inflation is essential to the economy.
The Bank of Canada, like many other central banks, has inflation “temporary” or “temporary” until the fall of 2021 until March 2022, when inflation has already exceeded the 2% target. I thought I didn’t start raising rates. ..
Prices are currently rising at levels not seen since 1983, reaching 7.7% in May and exceeding the target for 15 months. As the prices of daily necessities soar, the risk of inflation becoming established is increasing.
According to a Canadian Conference Committee survey released this week, three-quarters of Canadians expect inflation to remain above target in three years. Bank of Canada’s own data also show less confidence in its ability to keep inflation low and stable.
“How can we stay credible? The best thing we do is get inflation back to our goal, and we’re absolutely focused on doing that,” Rogers said. rice field.
“It won’t happen overnight,” she added. “But we are paving the way and working.”
Canada’s inflation rate soars in May
“A fairly serious communication mistake”
It may have been slow to start as banks in July 2020 stuck to forward guidance and promised to keep interest rates at a solid level until the expected years of “absorption of the economic downturn.”
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“If you have a mortgage or are considering a large purchase, you can be confident that interest rates will be low over the long term,” Macklem said in July 2020.
Rogers said he had to stick to forward guidance.
However, according to interviews with economists and former central bankers, doing so tied up banks and made them react more slowly than usual due to overheating of parts of the economy.
McClem also suggested that he wanted a full labor market recovery before raising interest rates. This was later confirmed when the bank’s policy mandate was updated in December, making interest rate outlook even more dovish.
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Canadians were led to believe that central banks were not overly concerned about inflation and therefore maintained interest rates that were “essentially zero forever, hell or high water.”
It was a “quite serious communication mistake,” Dodge told Reuters.
Dodge and other Reuters revealed that it was right for the central bank to respond vigorously at the start of the pandemic, saying the unprecedented nature of the crisis made it difficult to predict the outcome.
“We understood a lot correctly. We made some mistakes. We were transparent about it,” Rogers said. “Our work depends on our ability to predict, and prediction has been a huge challenge for everyone in this environment.”
Treasury Minister Justin Trudeau and Chrystia Freeland defend the central bank’s independence and attribute the rise in prices to global supply chain woes and unexpected wars in Europe.
“Not everyone understands everything right,” said a senior government official. “But what didn’t work for (Bank of Canada) was that (Vladimir) Putin was trying to invade Ukraine.”
Economists agree that the war in Ukraine complicated the situation and caused inflation to rise sharply, but it had already persisted before the invasion. Complicating the situation is that the central bank is currently raising interest rates, despite the federal government’s continued development of stimulus.
Freeland’s office defended that choice, saying that this year’s budget is “especially on the path to rapid fiscal tightening by peer standards.”
The market is betting on a rise of 75 basis points in July, and economists are now facing a surge in debt repayment costs, although there is an aggressive tightening risk that undermines the credibility of banks with promised cheap money. It states that it is.
Canada’s former red-hot housing market is already showing a crack due to high interest rates as sales plummet and prices fall below their February peaks.
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David Struba, a resident of Ottawa, added that he was not confident that he would trust the Bank of Canada to bring inflation back to its target.
“If they’re just raising interest rates and that’s their main control, I don’t know how effective it will be,” he shrugged. “Inflation is still rising.”
Derek Holt, vice president of capital markets and economics at Scotiabank, said one way to regain public confidence is to publish the minutes of a central bank meeting.
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“The Bank of Canada says it’s consensus-driven, so if that’s really true, they should have no problem revealing how this consensus was achieved. “He said.
The Bank of Canada states that the fact that consensus decisions are made does not require formal minutes, and the quarterly monetary policy report “provides transparency to deliberations.”
Rogers said banks are doing their best to “present different perspectives” in their speeches and statements.
But so far, it has rarely subdued critics. Populist and Bitcoin enthusiast Poilievre continues to drive the story across social media with tweets and Facebook posts that win thousands of likes from 500,000 followers.
“They did what Trudeau told them: printing money for the deficit, causing runaway inflation and a dangerous housing bubble,” he wrote in a tweet earlier this month.
(Report by Julie Gordon and Steve Scheller in Ottawa, edited by Denny Thomas and Deepa Babington)
Banks of Canada face rare political heat amid rising inflation-nationwide
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