REPORT: Weak Inflation Raises Questions About Bank Of Canada Rate Hike Plans

With some economists predicting that the Bank of Canada will raise interest rates to 1.5% by 2018, persistently low inflation is raising questions about whether more rate hikes make sense in the current economic climate.

As reported by Bloomberg, according to a survey of 16 economists (whatever that’s worth), the biggest monetary policy risk is “that inflation remains below target. They flagged a housing correction and U.S. policies that hurt Canada’s economic growth as the second-biggest.”

Serious contradictions

One of the key problems facing the Bank of Canada is that the economy is no longer working in a way that fits with past understanding. Interest rates of near zero percent were supposed to lead to a surge in economic growth and rising inflation. That hasn’t taken place, which eliminates one justification for raising rates.

Bloomberg noted the comments of one economist, who raised that concern:

‘“The Bank of Canada is at risk of raising interest rates too fast due to faith in its models. Inflation has yet to bottom and housing is a big risk,” James Orlando, senior economist at Toronto-Dominion Bank, said in an email responding to the survey.”

However, simultaneously to low inflation and low growth, a massive housing bubble has formed, and household debt has risen to record highs. So, the Bank of Canada is now trying to thread an almost imperceptible needle: Raise rates enough to cool off the housing market and reduce debt levels without causing even lower growth and lower inflation.

And yet, the fact that there is so little room for error shows the underlying problem with our economy. With an evaporating middle class, growth fuelled by debt, and no real wage gains in 40 years, our economy is far weaker than many realize. The concentration of wealth has led to an economy where a few people benefit massively while the vast majority struggle just to keep up.

In this environment, the Bank of Canada is trying to apply old policy solutions to a new problem. And judging by the tentativeness and seeming confusion of top policymakers, it seems they are starting to question their own ability to fix such a weak and fragile system.

Spencer Fernando


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