Monetary Policy - Op Eds

Published in the Globe and Mail.

The inflation beast is looking considerably weaker. Between the Bank of Canada’s rate announcement on Sept. 4 and its announcement on Wednesday, Statistics Canada released two of its monthly reports on the consumer price index. They showed that headline inflation fell by almost a full percentage point and is now well below target.

For this reason, markets were not surprised by the 50-basis point cut in the Bank of Canada’s overnight rate target. The cut was fully baked into market expectations, and there was even speculation about a supersized cut of 75 basis points.

As it is, the bank has more work to do with its overnight rate. With inflation falling faster than the policy rate,…

Published in the Financial Post.

It is rare for the Bank of Canada to change its policy interest rate by more than 25 basis points, either up or down. Big changes have been reserved for crises, like the beginning of the pandemic, when the Bank made three 50-basis-point cuts in a single month, or when inflation is running out of control, as it was in late 2022 when the bank raised its rate by 50 basis points. Last week’s news that inflation has returned to the bank’s two percent target does not signal a crisis but in our view it does mean a larger-than-normal cut is called for. Without an aggressive cut, the economy could tip into a needless recession.

It’s been a long road since inflation first rose above its official two…

Published in The Globe and Mail.

Two years ago, the federal government made a surprising decision to cease issuing Real Return Bonds (RRBs) – the government of Canada bonds that are indexed to the Consumer Price Index. It justified cancelling new issues of RRBs with the argument that there was not enough demand for them. Yet RRBs are a valuable tool for investors to protect themselves from inflation and for the government to contain the cost of its debt. This is why it’s time to reverse this decision and bring RRBs back to the market even bigger and better than before.

RRBs are unique. Their principal increases with the price level, meaning that whether inflation is 2 per cent – in line with the current commitment of the…

Published in The Globe and Mail. 

With CPI inflation slowing to 2.5 per cent in July, the rate cut announced by the Bank of Canada on Wednesday surprised no one.

Given the dovish tone of the bank’s announcement, it would be reasonable to expect at least one and possibly two more 25-basis point cuts before the end of this year (a basis point is one-hundredth of a percentage point).

This cut widened the gap between the Bank of Canada’s overnight rate target and the top of the U.S. Federal Reserve’s band for its equivalent, the federal funds rate, from 50 basis points at the end of May to 1.25 per cent.

Should this gap worry the Bank of Canada – perhaps lead it not to cut the overnight rate again even if it…

Published in The Globe and Mail. 

When headline inflation increased to 2.9 per cent in May, up from 2.7 per cent in April, there was much speculation that the Bank of Canada would pause its rate cuts. However, it ticked back down to 2.7 per cent in June. That, plus a weakening labour market and stagnating per capita GDP, made it practically certain the bank would cut on Wednesday. It did.

Whether the bank has entered an easing cycle is no longer the question. The only question left is how far and how fast the Bank of Canada continues to cut interest rates.

There are several upside risks to inflation in the near future which could cause the bank to pause its rate cuts. We think it shouldn’t. Here’s why.

The…