Bank Of Canada Holds Benchmark Interest Rate At 5%, Notes “Weaker Growth”

Many politicians – who supported inflationary spending – called on the Bank of Canada not to raise interest rates, an example of wanting to have your cake and eat it too.

To say Canada has gone on a spending binge as of late would be an understatement.

Our spending during the pandemic – at a time when all governments opened the spending taps to varying degrees – far outpaced the spending of many peer nations.

Bank of Canada money printing was also seen by many as excessive:

Bank of Canada Assets Growth

Unlike other heavy-spending nations like the United States, Canada has combined our free spending ways with higher taxes and anti-growth government policies.

Thus, the government spiked demand by liberally throwing around a ton of money, while also restraining demand through policies like the carbon tax and opposition to affordable energy.

It doesn’t take a world-class economist to tell us that the combination of those policies will drastically reduce the purchasing power of Canadians.

And that is exactly what has happened.

There’s a reason we are seeing more and more Canadians posting on social media about how difficult it is to make ends meet.

Most people are working just as hard as they were before, and many are working even harder. And, many are technically getting paid more in terms of raw monetary units.

However, inflation means those monetary units are worth less individually than before.

Understandably, it can be difficult for people to grasp this, because we tend to think of money having intrinsic value, when it really only has value relative to the goods and services it is used to purchase.

The most extreme example of this was the hyperinflation in Zimbabwe. Measured in Zimbabwe’s currency, everyone was a ‘billionaire.’ In fact, Zimbabwe was at one point printing a 100 trillion dollar bank note. Of course, it was functionally worthless.

Canada is nowhere near that point, but the underlying principle is the same. If a central bank and federal government dilutes the value of our money by rapidly increasing the supply of money while restraining the supply of goods, our money simply doesn’t go as far.

Have your cake and eat it too

Now, while it would be unfair to expect everyone to be an expert in monetary policy, we would expect our political leaders to have at least a basic grasp of how things work. But alas, that would seem to be too much to ask.

Ahead of the Bank of Canada’s interest rate announcement, several provincial Premiers called for the BoC to hold rates, saying Canadians couldn’t afford another interest rate hike.

Yet, many of Canada’s provincial Premiers have been glad to support inflationary spending and carbon tax increases. Thus, they are trying to avoid the fact that if inflationary spending is not pulled back, interest rates are the only way to reliably address inflation.

Many politicians – particularly of the Liberal variety – want all the political benefits of rampant spending and carbon tax virtue-signalling, without accepting the inevitable consequences of those policies. This desire to have your cake and eat it too is a serious problem in Canada.

As I’ve often said, economic and monetary reality can be put off or obscured for a while, but sooner or later it will reassert itself. Countries that try to ‘bypass’ economic reality by ‘growing’ the economy through rampant spending and population increases will give back that ‘growth’ through lower per capita GDP and reduced purchasing power.

Did the Bank of Canada cave to the pressure?

With all of this in mind, the Bank of Canada’s decision to hold the benchmark interest rate at 5% may be seen by some as caving to the pressure.

It wouldn’t be the first time, as the BoC long-enabled Justin Trudeau’s inflationary spending, only reversing course when it became obvious that inflation wasn’t going to be ‘transitory.’

The Bank of Canada would of course dispute this, and their interest rate decision emphasized the weakening of Canada’s economic growth as a justification for standing pat.

You can read the full decision here:

“The Bank of Canada today held its target for the overnight rate at 5%, with the Bank Rate at 5¼% and the deposit rate at 5%. The Bank is also continuing its policy of quantitative tightening.

Inflation in advanced economies has continued to come down, but with measures of core inflation still elevated, major central banks remain focused on restoring price stability. Global growth slowed in the second quarter of 2023, largely reflecting a significant deceleration in China. With ongoing weakness in the property sector undermining confidence, growth prospects in China have diminished. In the United States, growth was stronger than expected, led by robust consumer spending. In Europe, strength in the service sector supported growth, offsetting an ongoing contraction in manufacturing. Global bond yields have risen, reflecting higher real interest rates, and international oil prices are higher than was assumed in the July Monetary Policy Report (MPR).

The Canadian economy has entered a period of weaker growth, which is needed to relieve price pressures. Economic growth slowed sharply in the second quarter of 2023, with output contracting by 0.2% at an annualized rate. This reflected a marked weakening in consumption growth and a decline in housing activity, as well as the impact of wildfires in many regions of the country. Household credit growth slowed as the impact of higher rates restrained spending among a wider range of borrowers. Final domestic demand grew by 1% in the second quarter, supported by government spending and a boost to business investment. The tightness in the labour market has continued to ease gradually. However, wage growth has remained around 4% to 5%.

Recent CPI data indicate that inflationary pressures remain broad-based. After easing to 2.8% in June, CPI inflation moved up to 3.3% in July, averaging close to 3% in line with the Bank’s projection. With the recent increase in gasoline prices, CPI inflation is expected to be higher in the near term before easing again. Year-over-year and three-month measures of core inflation are now both running at about 3.5%, indicating there has been little recent downward momentum in underlying inflation. The longer high inflation persists, the greater the risk that elevated inflation becomes entrenched, making it more difficult to restore price stability.

With recent evidence that excess demand in the economy is easing, and given the lagged effects of monetary policy, Governing Council decided to hold the policy interest rate at 5% and continue to normalize the Bank’s balance sheet. However, Governing Council remains concerned about the persistence of underlying inflationary pressures, and is prepared to increase the policy interest rate further if needed. Governing Council will continue to assess the dynamics of core inflation and the outlook for CPI inflation. In particular, we will be evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behavior are consistent with achieving the 2% inflation target. The Bank remains resolute in its commitment to restoring price stability for Canadians.”

Trapped

Whether the Bank of Canada caved to pressure or not, the fact remains that they are trapped. Because the Liberal government refuses to take prudent steps to reduce spending and ease the inflationary pressure, it all falls to the Bank of Canada. They will either be accused of doing too much or too little, and while an institution as powerful as the BoC must be subject to scrutiny and criticism, we should also remember that it’s the misguided policies Liberal government that have pushed the Canadian economy into a state in which there are only tough choices left.

Spencer Fernando

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