Timing is everything when it comes to managing the pandemic recovery.
Tiff Macklem, Canada’s top central banker, made a point of that at the beginning of COVID-19, quickly mobilizing all of the Bank of Canada’s firehoses to extinguish the flames undermining financial markets — with quite a bit of success.
Now, on the other side, he needs to carefully calibrate how he withdraws the bank’s support.
The stakes are just as high. Inflation is raging, labour is in short supply, and uncertainty around where Russia, China, and commodity prices will take us is heightened.
One false move, and we will be in another economic pickle before you know it, with inflation on the rise even as the global economy dramatically slows and policy-makers everywhere have a hard time seeing what fresh crisis is next.
“Until inflation moves significantly lower, there is an elevated risk that Canadians will start to believe that it will stay high over the long term,” the central bank warns in its quarterly outlook issued Wednesday in tandem with a hefty increase in its key interest rate.
In other words, the central bank feels it is losing control of the narrative, and its ability to tell us a story that ends with happily-ever-after has eroded.
The half-percentage-point rate hike is meant to drive consumers back under their covers, cool off demand and inspire Canadians to have faith that inflation will back off soon enough.
Following on the heels of a quarter-percentage-point hike in January, it’s an aggressive start to what will likely be a prolonged period of tightening. The goal is a gradual return to steady growth, low inflation, and a reliable balance of supply and demand, all within two years — as per the central bank’s long-standing mandate.
But it’s not the only thing going on here.
The central bank is also winding down its intense pandemic bond-buying activities, allowing its holdings to expire off the books and letting the financial markets fend for themselves.
And the federal government is pulling way back on its income supports for people dealing with COVID-19.
As far as economic policy is concerned, the pandemic is over — even if there are tens of thousands of Canadian workers calling in sick because of the virus and its associated caregiving burden.
Instead of support, both the government and bank are now scrambling to deal with the aftermath of having swamped households and markets with easy money for two years, in parallel with actions from governments and central banks around the world.
There’s still $40 billion burning a hole in Canadians’ pockets, left over from all the savings and government benefits that came our way during the previous waves of the pandemic.
And the world is not co-operating. Russia’s invasion of Ukraine means inflation is far higher and more stubborn than the bank’s army of economists could have ever foreseen, driving up prices for gas, fuel and food in a way that bites every country and household, but disproportionately hits low-income families and poor countries to the point of unacceptable discomfort.
The central bank has now significantly scaled back its growth projections for the United States, Europe and the world writ large for next year.
In Canada, so far, it looks like we’ll be OK thanks mainly to our plentiful oil, gas and commodities. Investment in those sectors is set to surge ahead, the bank says, and higher global prices give us a bounty.
But there are a lot of choose-your-own-adventure threads to the bank’s story of coasting back to normalcy within two years.
No one really knows how the housing market will react to a steep increase in interest rates. Some people used their pandemic savings to pay down their debts, and they’re in good shape. Others used their windfall to jump into the housing market or upscale, perhaps getting in over their heads.
No one really knows how the Canadian dollar will react to rates rising here and elsewhere even as commodity prices climb. So far, the loonie hasn’t seen its traditional bounce, and that means imports aren’t as cheap as we could once count on.
And no one knows if the public will buy the story that the central bank has this all under control and we’ll be back to normal in two years.
It doesn’t help that the front-runner to lead the Official Opposition who defines himself as the next prime minister is actively taking a run at the bank’s — and Macklem’s — credibility and integrity. Pierre Poilievre is peddling a counternarrative that urges his crowds of thousands to buy into cryptocurrency so they can “opt out” of inflation and do an end-run around oppressive economic policy-makers.
Maybe the Bank of Canada will be able to calibrate its interest-rate hikes in lockstep with the rest of the world to gently wean us off pandemic stimulus, bring the Canadian economy gradually back to balance, and without undue harm to homeowners or vulnerable families.
But the last two years have shown us that the public and policy-makers alike are susceptible to being blindsided, and the stories we tell ourselves about recovery don’t hold true any more.
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