David Olive: Armchair Bank of Canada critics like Pierre Poilievre should stick to football

Opinion May 14, 2022 by David Olive Star Business Columnist

The Bank of Canada (BoC) has seldom been under as much fire as it is today.

The BoC sets interest rates that determine borrowing costs. And it pumps money into a stalled economy to get it moving again or withdraws money to stop the economy from overheating.

The bank is now faulted for botching those jobs, which are crucial in the fight against inflation.

With inflation running at a 30-year high, the search for a scapegoat is perhaps unavoidable.

The most ardent, and addled, of BoC critics is Pierre Poilievre, a Tory MP campaigning for the leadership of the Conservative Party.

But credible observers believe the bank waited too long to begin its current cycle of raising interest rates to subdue inflation.

They also believe it injured its credibility by not pulling back on government debt purchases earlier, which might have kept inflation from reaching today’s high level.

“Canadian monetary policy is far behind the curve,” Scotiabank economist Derek Holt asserted in a Mar. 16 client note.

Some bank critics have since sharpened their fault-finding with the BoC.

Back in February, this space wondered why the bank hadn’t begun to raise rates once inflationary signs had become abundant.

But that argument might have understated the impact of the BoC’s repeated warnings, dating from last fall, that higher rates were coming.

Those warnings probably caused the financial markets to exert some downward pressure on prices ahead of actual rate hikes.

The bank has since raised rates, of course, and aggressively. Beginning March 2, it has raised borrowing costs fourfold in the short space of six weeks. Additional sizable hikes will follow this year. Bank Gov. Tiff Macklem has vowed to act “as forcefully as needed” to subdue inflation, a more open-ended commitment than his counterparts at the U.S. Federal Reserve have offered.

Some recent history: The BoC kept interest rates at a rock-bottom level during the pandemic. It hoped that low borrowing costs would kick-start the economy once pandemic restrictions began to be lifted. And it bought federal debt to finance Ottawa’s unprecedented infusion of cash into Canadian households to keep them whole until the worst of the pandemic had passed.

And those measures worked.

Canada’s economic recovery has been among the fastest of the world’s major economies. The country is closer to full employment than at any time in its modern history. Corporate profits are strong, and debt is low.

As well, the abnormally high Canadian inflation rate — 6.7 per cent in March — is less severe than the 7.8 per cent inflation in the European Union that month. The U.S. inflation rate was higher still at 8.5 per cent.

But in a hopeful sign that inflation might have crested, the U.S. reported this week that in April its inflation rate declined by 0.2 per cent. (The April numbers for Canada will be reported in the next few days.)

As it happens, the BoC has led its peers in raising interest rates. In its first two hikes, the Fed followed the BoC by about two weeks. The Fed today is under the same intense criticism as the BoC for its hesitancy in raising rates.

Meanwhile, a European Central Bank (ECB) that has yet to raise rates now faces the same quandary as its North American peers had earlier. A North American economic recovery that still seemed fragile to Canadian and U.S. central bankers last winter is now very much in peril in the European Union (EU).

The Ukraine war’s knock-on effects extend throughout and beyond the EU, of course. They are causing continued upward pressure on gasoline prices in the GTA and on supply chains everywhere.

The impact of higher interest rates in reducing inflation is gradual, one reason the critics say the cycle of raising them should have begun earlier.

It is true that last year, central bankers and a lot of economists in North America and Europe misjudged how bad inflation might get, some dismissing it as “transitory.” That judgment, in turn, was based on a flawed assumption that global supply chains would be functioning more smoothly by now.

“We got a lot of things right,” Macklem testified to the Senate banking committee late last month. “We got some things wrong, and we are adjusting.”

But by playing a lead role in rescuing the Canadian pandemic economy the BoC withstood a historic test of its credibility. To ask more is to assume the economy is a Swiss timepiece that can be calibrated with precision.

Instead, we were suddenly hit last fall with a highly disruptive Omicron outbreak that lasted several months.

It’s at that perilous moment that many critics say the bank should have started raising rates and taken a chance on tanking the economic recovery.

Monday-morning quarterbacking can be fun, but sometimes the critics should stick to football.

David Olive: Armchair Bank of Canada critics like Pierre Poilievre should stick to football

The Bank of Canada’s moves post-pandemic haven’t been perfect, writes David Olive, but our country has had among the fastest economic recoveries in the world with corporate profits strong and debt low

Opinion May 14, 2022 by David Olive Star Business Columnist

The Bank of Canada (BoC) has seldom been under as much fire as it is today.

The BoC sets interest rates that determine borrowing costs. And it pumps money into a stalled economy to get it moving again or withdraws money to stop the economy from overheating.

The bank is now faulted for botching those jobs, which are crucial in the fight against inflation.

With inflation running at a 30-year high, the search for a scapegoat is perhaps unavoidable.

The most ardent, and addled, of BoC critics is Pierre Poilievre, a Tory MP campaigning for the leadership of the Conservative Party.

But credible observers believe the bank waited too long to begin its current cycle of raising interest rates to subdue inflation.

They also believe it injured its credibility by not pulling back on government debt purchases earlier, which might have kept inflation from reaching today’s high level.

“Canadian monetary policy is far behind the curve,” Scotiabank economist Derek Holt asserted in a Mar. 16 client note.

Some bank critics have since sharpened their fault-finding with the BoC.

Back in February, this space wondered why the bank hadn’t begun to raise rates once inflationary signs had become abundant.

But that argument might have understated the impact of the BoC’s repeated warnings, dating from last fall, that higher rates were coming.

Those warnings probably caused the financial markets to exert some downward pressure on prices ahead of actual rate hikes.

The bank has since raised rates, of course, and aggressively. Beginning March 2, it has raised borrowing costs fourfold in the short space of six weeks. Additional sizable hikes will follow this year. Bank Gov. Tiff Macklem has vowed to act “as forcefully as needed” to subdue inflation, a more open-ended commitment than his counterparts at the U.S. Federal Reserve have offered.

Some recent history: The BoC kept interest rates at a rock-bottom level during the pandemic. It hoped that low borrowing costs would kick-start the economy once pandemic restrictions began to be lifted. And it bought federal debt to finance Ottawa’s unprecedented infusion of cash into Canadian households to keep them whole until the worst of the pandemic had passed.

And those measures worked.

Canada’s economic recovery has been among the fastest of the world’s major economies. The country is closer to full employment than at any time in its modern history. Corporate profits are strong, and debt is low.

As well, the abnormally high Canadian inflation rate — 6.7 per cent in March — is less severe than the 7.8 per cent inflation in the European Union that month. The U.S. inflation rate was higher still at 8.5 per cent.

But in a hopeful sign that inflation might have crested, the U.S. reported this week that in April its inflation rate declined by 0.2 per cent. (The April numbers for Canada will be reported in the next few days.)

As it happens, the BoC has led its peers in raising interest rates. In its first two hikes, the Fed followed the BoC by about two weeks. The Fed today is under the same intense criticism as the BoC for its hesitancy in raising rates.

Meanwhile, a European Central Bank (ECB) that has yet to raise rates now faces the same quandary as its North American peers had earlier. A North American economic recovery that still seemed fragile to Canadian and U.S. central bankers last winter is now very much in peril in the European Union (EU).

The Ukraine war’s knock-on effects extend throughout and beyond the EU, of course. They are causing continued upward pressure on gasoline prices in the GTA and on supply chains everywhere.

The impact of higher interest rates in reducing inflation is gradual, one reason the critics say the cycle of raising them should have begun earlier.

It is true that last year, central bankers and a lot of economists in North America and Europe misjudged how bad inflation might get, some dismissing it as “transitory.” That judgment, in turn, was based on a flawed assumption that global supply chains would be functioning more smoothly by now.

“We got a lot of things right,” Macklem testified to the Senate banking committee late last month. “We got some things wrong, and we are adjusting.”

But by playing a lead role in rescuing the Canadian pandemic economy the BoC withstood a historic test of its credibility. To ask more is to assume the economy is a Swiss timepiece that can be calibrated with precision.

Instead, we were suddenly hit last fall with a highly disruptive Omicron outbreak that lasted several months.

It’s at that perilous moment that many critics say the bank should have started raising rates and taken a chance on tanking the economic recovery.

Monday-morning quarterbacking can be fun, but sometimes the critics should stick to football.

David Olive: Armchair Bank of Canada critics like Pierre Poilievre should stick to football

The Bank of Canada’s moves post-pandemic haven’t been perfect, writes David Olive, but our country has had among the fastest economic recoveries in the world with corporate profits strong and debt low

Opinion May 14, 2022 by David Olive Star Business Columnist

The Bank of Canada (BoC) has seldom been under as much fire as it is today.

The BoC sets interest rates that determine borrowing costs. And it pumps money into a stalled economy to get it moving again or withdraws money to stop the economy from overheating.

The bank is now faulted for botching those jobs, which are crucial in the fight against inflation.

With inflation running at a 30-year high, the search for a scapegoat is perhaps unavoidable.

The most ardent, and addled, of BoC critics is Pierre Poilievre, a Tory MP campaigning for the leadership of the Conservative Party.

But credible observers believe the bank waited too long to begin its current cycle of raising interest rates to subdue inflation.

They also believe it injured its credibility by not pulling back on government debt purchases earlier, which might have kept inflation from reaching today’s high level.

“Canadian monetary policy is far behind the curve,” Scotiabank economist Derek Holt asserted in a Mar. 16 client note.

Some bank critics have since sharpened their fault-finding with the BoC.

Back in February, this space wondered why the bank hadn’t begun to raise rates once inflationary signs had become abundant.

But that argument might have understated the impact of the BoC’s repeated warnings, dating from last fall, that higher rates were coming.

Those warnings probably caused the financial markets to exert some downward pressure on prices ahead of actual rate hikes.

The bank has since raised rates, of course, and aggressively. Beginning March 2, it has raised borrowing costs fourfold in the short space of six weeks. Additional sizable hikes will follow this year. Bank Gov. Tiff Macklem has vowed to act “as forcefully as needed” to subdue inflation, a more open-ended commitment than his counterparts at the U.S. Federal Reserve have offered.

Some recent history: The BoC kept interest rates at a rock-bottom level during the pandemic. It hoped that low borrowing costs would kick-start the economy once pandemic restrictions began to be lifted. And it bought federal debt to finance Ottawa’s unprecedented infusion of cash into Canadian households to keep them whole until the worst of the pandemic had passed.

And those measures worked.

Canada’s economic recovery has been among the fastest of the world’s major economies. The country is closer to full employment than at any time in its modern history. Corporate profits are strong, and debt is low.

As well, the abnormally high Canadian inflation rate — 6.7 per cent in March — is less severe than the 7.8 per cent inflation in the European Union that month. The U.S. inflation rate was higher still at 8.5 per cent.

But in a hopeful sign that inflation might have crested, the U.S. reported this week that in April its inflation rate declined by 0.2 per cent. (The April numbers for Canada will be reported in the next few days.)

As it happens, the BoC has led its peers in raising interest rates. In its first two hikes, the Fed followed the BoC by about two weeks. The Fed today is under the same intense criticism as the BoC for its hesitancy in raising rates.

Meanwhile, a European Central Bank (ECB) that has yet to raise rates now faces the same quandary as its North American peers had earlier. A North American economic recovery that still seemed fragile to Canadian and U.S. central bankers last winter is now very much in peril in the European Union (EU).

The Ukraine war’s knock-on effects extend throughout and beyond the EU, of course. They are causing continued upward pressure on gasoline prices in the GTA and on supply chains everywhere.

The impact of higher interest rates in reducing inflation is gradual, one reason the critics say the cycle of raising them should have begun earlier.

It is true that last year, central bankers and a lot of economists in North America and Europe misjudged how bad inflation might get, some dismissing it as “transitory.” That judgment, in turn, was based on a flawed assumption that global supply chains would be functioning more smoothly by now.

“We got a lot of things right,” Macklem testified to the Senate banking committee late last month. “We got some things wrong, and we are adjusting.”

But by playing a lead role in rescuing the Canadian pandemic economy the BoC withstood a historic test of its credibility. To ask more is to assume the economy is a Swiss timepiece that can be calibrated with precision.

Instead, we were suddenly hit last fall with a highly disruptive Omicron outbreak that lasted several months.

It’s at that perilous moment that many critics say the bank should have started raising rates and taken a chance on tanking the economic recovery.

Monday-morning quarterbacking can be fun, but sometimes the critics should stick to football.