Rarely has the Bank of Canada (BoC) been under so much fire as it is now.
The BoC sets interest rates that determine the cost of financing. And it pumps money into a stalled economy to get it moving again or takes out money to keep the economy from overheating.
The bank is now accused of screwing up those jobs, which are crucial in the fight against inflation.
With inflation at its highest point in 30 years, the search for a scapegoat may be inevitable.
The most ardent and confused BoC critics are Pierre Poilievre, a Tory MP who is campaigning for the leadership of the Conservative Party.
But credible observers believe the bank has waited too long to start its current cycle of rate hikes to contain inflation.
They also believe it damaged its credibility by failing to pull back on government debt purchases earlier, which may have prevented inflation from reaching its current high level.
“Canadian monetary policy is way behind the curve,” said Scotiabank economist Derek Holt in a March 16 client note.
Some banking critics have since sharpened their mistakes at the BoC.
In February, this space wondered why the bank hadn’t started raising interest rates as soon as there were signs of inflation.
But that argument would have underestimated the impact of the BoC’s repeated warnings, dating back last fall, that higher rates would come.
Those warnings likely led financial markets to exert some downward pressure on prices in the run-up to actual rate hikes.
The bank has obviously raised interest rates and aggressively since then. As of March 2, it has quadrupled borrowing costs in a short period of six weeks. This year there are still long walks to follow. Banking government Tiff Macklem has vowed to act “as forcefully as necessary” to contain inflation, a more open-ended deal than his counterparts at the US Federal Reserve have offered.
Some recent history: The BoC kept interest rates at rock bottom during the pandemic. It hoped that low borrowing costs would boost the economy once pandemic restrictions were lifted. And it bought federal debt to fund Ottawa’s unprecedented infusion of cash into Canadian households to keep them intact until the worst of the pandemic was over.
And those measures have worked.
Canada’s economic recovery is among the fastest of the major economies in the world. The country is closer to full employment than at any time in its modern history. Corporate earnings are strong and debt is low.
Also, the abnormally high Canadian inflation – 6.7 percent in March – is less severe than the 7.8 percent inflation rate in the European Union that month. Inflation in the US was even higher at 8.5 percent.
But in a hopeful sign that inflation may have risen, the US reported this week that inflation had fallen 0.2 percent in April. (April figures for Canada will be reported in the coming days.)
Coincidentally, the BoC has led the way in raising interest rates. In the first two rate hikes, the Fed followed the BoC by about two weeks. The Fed is under the same intense criticism as the BoC today for its hesitation in raising rates.
Meanwhile, a European Central Bank (ECB) that has yet to raise interest rates faces the same dilemma as its North American counterparts previously. An economic recovery in North America that seemed fragile to Canadian and US central bankers last winter is now very much in jeopardy in the European Union (EU).
The knock-on effects of the war in Ukraine extend beyond and beyond the EU, of course. They are causing continued upward pressure on petrol prices in the GTA and on supply chains everywhere.
The effect of higher interest rates on reducing inflation is gradual, one of the reasons critics say the cycle of raising rates should have started earlier.
It is true that last year central bankers and many economists in North America and Europe misjudged how bad inflation could get, some dismissing it as “transient”. That judgment, in turn, was based on a flawed assumption that global supply chains would now function more smoothly.
“We’ve done a lot of things right,” Macklem testified before the Senate Banking Committee late last month. “We’ve done some things wrong and we’re adjusting.”
But by playing a leading role in saving Canada’s pandemic economy, the BoC has passed a historic test of its credibility. More questions is assuming the economy is a Swiss timepiece that can be calibrated with precision.
Instead, last fall, we were suddenly hit by a very disruptive Omicron outbreak that lasted several months.
It is at that perilous moment that many critics say the bank should have started raising interest rates and taking the risk of slowing the economic recovery.
Monday morning quarterbacks can be fun, but sometimes the critics have to stick to football.