Op-Eds
We have not seen inflation this high in Canada for decades. With it has come a resurgence of arguments not heard for many years, both about the causes of inflation and whether we should reduce it.
These arguments will be fierce. Getting inflation back to the 2-per-cent target set by the Bank of Canada will mean tighter monetary policy, including higher interest rates. That will hurt – but inflation hurts more. The sooner we settle on what to do about it, the easier reducing it will be.
Disagreement about what causes inflation matters. After all, if inflation were not related to monetary policy, asking the central bank to fix it would make no sense. Higher prices at stores or in Statistics Canada reports often seem…
On Monday the Bank of Canada and Government of Canada finally announced the renewal of their agreement concerning the country’s monetary policy framework. The announcement reconfirmed their joint commitment to the two per cent inflation target within a band of one to three per cent. With the current agreement expiring at the end of the month, the down-to-the-wire announcement had led some pundits to expect a major surprise, and even in the follow-up coverage there are hints some believe this is what happened. We do not see it that way – which is good. The Bank’s mandate remains essentially unchanged from the last renewal, and from renewals all the way back to 1995 when the two per cent inflation target was first implemented. Extending…
Bank of Canada governor Tiff Macklem, like U.S. Fed chairman Jerome Powell, is clearly starting to view continuing high inflation with concern. A change is coming in monetary policy. With demand outrunning supply, our central banks’ policy interest rates need to rise – and may rise a lot.
Before COVID-19 triggered a monetary explosion, inflation in Canada and the United States had been so low for so long that most people could ignore it, and ignore monetary policy as well. Inflation was reliably close to 2 per cent year after year. The Bank of Canada’s overnight rate, its benchmark policy rate, and the U.S. equivalent, the Fed Funds rate, moved much less than they had when inflation was high and variable. How central bank policy…
Inflation has risen to almost five per cent and the year-end deadline for the federal government and the Bank of Canada to announce a new monetary policy framework is barely three weeks away. Should we be nervous?
Since 1991, the framework has been an inflation-control target, and since the end of 1995 that target has been two per cent. That system has been a striking success. The CPI’s average increase over the 25 years from 1995 until the onset of the pandemic was 1.9 per cent annually. Previous five-year renewals of the inflation-control agreement were quiet affairs with only minor tweaks.
Not so this time. COVID’s hit to productive capacity has combined with massive monetary and fiscal stimulus to push inflation well…
I first heard the gibe that “central bankers think inflation is always and everywhere a monetary phenomenon – except this time, of course” more than 50 years ago, but it is still as good as new.
Consider the Bank of Canada, now caught in a trap of its own making. Its mandate, pending an imminent renewal, requires it to maintain inflation in a range around two per cent, but its “forward guidance,” issued incessantly for the past year, has promised to keep the overnight rate of interest at 0.25 per cent until the real economy has returned to “normal” — at a date that lately seems to have been creeping closer from its original value somewhere around the end of 2022. The Bank is stuck with two quantitative targets, one, an inflation…
