Stop Causing Inflation Bank Of Canada
By Dave Crapper
The recent report about inflation from Statistics Canada is very revealing.
According to the release, StatsCan says the biggest driver of inflation is now mortgage-interest costs. If you remove these costs from the calculation, inflation rose at an annual rate of 2.3 per cent, instead of the 3.3 per cent annualized “all-in” number.
Think about that.
We have an inflation problem, so the Bank of Canada raises interest rates to stifle borrowing, which slows spending, which cools inflation. Remember an enormous amount of the total borrowing Canadians do is for mortgages.
So now the increases in mortgage costs, brought about by the Bank of Canada’s deliberate decisions to fight inflation, are the biggest causes of inflation.
In other words, the cure has now become the biggest contributor to the disease.
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By the way, this is the same bank that kept rates far too low for far too long. And it’s the bank of a prime minister who smirked in the last election that he doesn’t loose sleep thinking about monetary policy.
Why would he? He lives in public housing. We pay his mortgage.
Incredibly, there are “serious” economic voices out there calling for more rate hikes. For them or anyone else to argue we need more interest rate hikes to cool inflation at this point in the cycle is like an oncologist saying that the cure for cancer is – wait for it – more cancer.
Central banks and their fixation on being data dependent mean they are constantly acting on old news. Any undergrad can read backward-looking data.
It’s time for the bank to exercise some judgment and experience, and start making decisions on what’s driving inflation, and where it’s headed, not where it has been. History matters, but we’re paying them to manage the future, not react to the past.
Memo to the Bank of Canada. If your past actions are now the problem, stop doing them.
Dave Crapper was formerly part-owner and chairman of Decima Research. He is currently president of Chelsea Realty Investments Inc. and a sales representative for Digi Realty.
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Since a key reason for inflation is governments spending far more money than they have, until this government stops spending money, the Bank of Canada will continue to maintain interest rates where they are. So far, an announcement to cut $15 bln. over 5 years or $3 bln/yr is nothing on a $490 billion budget so this government is not at all serious about reigning in the deficit let alone doing anything about the growing debt. They should look at what Martin/Chretien had to do to get the budget back in balance. As well, if the BoC lowers the interest rate too quickly and the U.S. doesn’t do the same, our dollar will plummet which will result in additional inflation because all of our imported goods will cost more as well as domestically produced commodities such as oil and gas which are priced in U.S. dollars. With the rise in oil prices over the past month, it is highly likely that the inflation rate will be higher in August than it was in July. I would also note that the reason inflation may have come down in other areas is because of higher interest rates were working. Therefore if you decrease rates too quickly, while you may reduce the cost of borrowing for housing, everything else may go back up again. As well, as long as housing demand and supply are significantly out of sync, housing inflation may still increase even if interest rates come down. We are also seeing unions trying to catch up to inflation which will no doubt serve to put pressure on prices. While it may be no comfort to those dealing with housing costs, the bank rate is close to its historic average. The last 10 years of almost zero rates is an historic anomaly. In the 90’s when the Bank of Canada finally got serious about inflation and raised rates over 10 % it took several years before they came down to their historic averages (i.e.: a bit lower than where we are today). The difference between today and the 90s is that in the 90s housing availability was balanced with demand.
The Bank of Canada is navigating by looking in the rear view mirror. Just another example of those who aspire to lead, but lack the necessary skills. Sigh.