Inflation expectations demonstrate that Canadians don’t trust the Bank of Canada, and that absence of trust will likely lead to even higher rate hikes.
In the early 1980’s, interest rates to shocking levels.
A key reason for this was – ironically – the lack of belief that interest rates would go up dramatically.
When people expect inflation to keep rising, and expect debt to remain cheap, they will bring spending forward, borrow more, and think more short-term. This provides a short-term economic boost – which governments love to take credit for – but it leads to more and more imbalances and sets the stage for disaster, since rising debt levels and short-term thinking are the antithesis of sustainable real economic growth.
Because central banks – including both the US Federal Reserve and the Bank of Canada – in the run up to the 1980’s had repeatedly backed off increasing rates under political pressure from free-spending politicians, the public assumed that any rate hikes would be limited and quickly reversed once economic pain was felt.
As a result of that diminished central bank credibility, interest rates had to rise immensely and stay high for a long-time before people really started to realize that the era of cheap debt and cheap money was over.
Here in Canada, it appears we are reaching a similar point.
The Bank of Canada lacks credibility
After months and months claiming inflation would remain low, that any inflation increases were ‘transitory,’ and that ‘deflation’ was the real threat, the Bank of Canada has attempted to change course.
They are now talking about inflation remaining high, and are trying to look serious in their efforts to combat it.
Of course, this whiplash-inducing reversal has shredded their credibility.
And according to a new survey, Canadians do indeed expect inflation to remain high, regardless of what the Bank of Canada says they are going to do about it:
“Canadians see consumer price pressures worsening over the next year and are unconvinced policy makers are committed to bringing inflation back to pre-pandemic levels, according to a new poll.
Asked what they think annual inflation will be in 12 months, a majority of respondents said it would be above the current level of about 7 per cent, according to a survey by Nanos Research Group for Bloomberg News. The median estimate was 8 per cent.
About 45 per cent in the survey expressed doubts about the Bank of Canada’s commitment to achieving its 2 per cent inflation target.
The results suggest opinion may be hardening around the idea inflation will remain elevated. It’s a worrying development for the central bank, as it could force policy makers into even more aggressive interest-rate hikes to keep expectations more anchored.”
Canadians have watched over the years as governments and central banks push irresponsible policies and endless bailouts.
Canadians have watched the Bank of Canada get things wrong over and over again.
And Canadians have
So, why should Canadians be confident in the Bank of Canada now?
Only actions, not words, will matter now.
Until Canadians see some real accountability, and see that the Bank of Canada is no longer enabling Trudeau’s free-spending ways, expectations of higher inflation will remain.
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