For years, central banks around the world have been helping consumers and businesses weather economic storms. Crisis after crisis, they lowered interest rates to help people out. They printed money and bought bonds to support the markets.
This time, those same banks are actively making life harder.
“I’m sure some of this stuff seems a bit counter-intuitive,” Bank of Canada Governor Tiff Macklem said.
The Bank of Canada has raised interest rates six times since March. Rates went from 0.25% to 3.75%. And the bank warned that it was not done yet.
“We think we still need to raise the rates a bit more,” Macklem told CBC News in an interview this week. “How far, we’ll see.”
WATCH | Tiff Macklem says Canadians should expect tough months ahead:
The bank is now raising rates to contain inflation which has reached its highest level in decades. Rising rates should slow the economy. As a result, Canadians who are already struggling to keep pace with the rising cost of living now face higher borrowing costs. And those higher borrowing costs will bring the economy down.
“We actually think growth will be close to zero for the next few quarters, through the middle of next year,” Macklem said.
He says the downturn in economic activity should be short and shallow. But it will have an impact.
“(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 helpless,” he said.
Canadian consumers aren’t the only ones frustrated. Economist Jim Stanford of the Canadian Center for Policy Alternatives says the central bank pushed rates too high, too quickly. Central banks around the world are looking at the current state of inflation, he said, and are assuming the cause and solution to be the same as the last inflation crisis of the 1970s and 1980s.
“I think policy makers in the Bank of Canada, government and academia are unduly obsessed with what happened in the 1970s. It’s like a nightmare,” Stanford said in an interview with CBC News. .
In the 1970s, real wages rose with prices. This time, real wages fell. In the 1970s, corporate profits were down. Right now, corporate profits are at record highs.
“So that’s the exact opposite of what we experienced in the 1970s. And taking a 50-year-old recipe and reapplying 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 more of a push.
Headline inflation has slowed. Supply chain issues are beginning to resolve. World commodity prices have started to decline.
New numbers won’t slow 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 slow rate hikes.
“Consumer price growth in Canada likely increased in October. We expect the annual rate to have increased to 7% from 6.9% in September, but still down from the recent peak of 8.1% in June,” Fan said in a note to the media. clients.
She says a resurgence in gasoline and heating oil prices was behind the rise, which should give the Bank of Canada enough reason to keep pushing rates higher.
“While there are signs that inflation has passed its peak in Canada, it will likely take a prolonged period of higher interest rates and a weaker economy for price growth to fully return to target rates of the central bank,” she wrote.
RBC’s forecast assumes the bank will hike another 25 basis points in early December and then pause to assess the impact of all those rate hikes on the economy.
But that means anyone with an adjustable rate mortgage or HELOC is looking at a further increase in their monthly payments.
“We are getting closer”
Macklem says he knows these rate hikes are making life harder for many Canadians.
“We don’t want to make it more difficult than necessary,” he said. “But at the same time, if we don’t do enough, if we’re lukewarm, Canadians are going to have to continue to suffer 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 need to take even more aggressive action going forward. If it goes over and continues to rise once inflation declines sustainably, Canadians will suffer unnecessarily.
The window to get that right is getting smaller and smaller.
“We believe further increases are needed, but we are getting closer to the end of this tightening cycle. I can’t tell you exactly what that is,” Macklem says.
“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 a long way off for anyone struggling to put food on their table or pay their mortgage payment today.