In a week, the Bank of Canada will release its first interest rate announcement of the year. A further rise in interest rates would be too much. There are growing signals from everywhere that the gains of the last year are beginning to have a major impact on the economy.
The Bank of Canada had a very bad year in 2022. Its main defense is that it has not underperformed other comparable central banks in the United States or Europe.
In late 2021, early 2022, the Bank of Canada misjudged the first inflation signals. When inflation started to rise, it was considered anecdotal and temporary. For several months the bank did nothing.
Then, in the spring, seeing that inflation was firmly established, Bank of Canada leaders had to act in catch-up mode, even panic mode. At that time, there were a series of drastic interest rate hikes, especially in the second half of the year.
This way of acting is very unhealthy. In economics, an institution whose decisions affect both consumers and businesses alike should move in a predictable and incremental manner. It should do everything in its power to enable economic actors to recognize and adapt to the coming changes.
In 2022, exactly the opposite happened. Within months, consumers and businesses were trapped by soaring borrowing costs. Month-to-month hikes in interest rates of half a point and even three-quarters of a point have radically altered the cost of borrowing.
A young couple who took out an adjustable rate mortgage to buy a property in February are facing hundreds of dollars more in monthly payments. A company that took out loans earlier this year to modernize its facilities found that all the calculations back then were no longer correct. Maybe she’s weak.
The Bank of Canada had no choice but to do something about inflation. But by delaying her first reaction, she forced herself to move very, even too abruptly.
Measure the impact
In the last few weeks we have seen inflation slow down. Not as much as expected, but still. We are also observing a drastic decrease in the number of real estate transactions. Big company CEOs, as well as finance ministers, are preparing for the likely scenario of a recession.
The Bank of Canada must take a step back. His rate hikes won’t take effect immediately. The increases from the end of 2022 are still having a negative effect. The bank must therefore pause its string of rate hikes.
It must prevent households and businesses from depositing their keys. The Bank of Canada must stay on course to reduce inflation, but it must consider the brutal nature of its recent approach.