Chairman's Desk

Having found its nerve, the Bank of Canada must hold it

The Bank of Canada must stay the course on high interest rates in the face of a frenzied appetite for them to come back down.


After being shelled with political fire for the past year, one might think the Bank of Canada would avoid differentiated forecasts until the noise around inflation began to abate. Instead, last week Canada’s central bank deviated from all others in G10 economies by explicitly signalling that a pause to interest rate hikes might be on the horizon.

While the Federal Reserve, Bank of England and European Central Bank were reluctant to make similar prognostications as they hiked rates this week, Gov. Tiff Macklem has boldly chosen to stick his head above the parapet.

In doing so, he has taken a significant risk; distinguishing himself from his counterparts gives his critics more fodder to misconstrue Macklem’s intentions.

Like its counterparts, the Bank of Canada was slow in acknowledging the deeply structural nature of inflation. Since then, it has remained steadfast in tightening monetary policy but now may have decided to move more quickly to a much hoped for endgame.

While Macklem was clear a pause doesn’t mean a pivot, his conditional commitment feeds an increasingly persistent notion that we are turning the corner on inflation. Speculative assets are up with markets champing at the bit for a return to cheaper money while the public, goaded by political criticisms that central banks are hell-bent on causing a recession, are ready to call it a day.

But people need to be reminded what the reality is rather than what they want it to be. While inflation has declined, it still sits at 6.3 per cent in Canada — a far cry from the target 2 per cent rate. Behaviour has a powerful effect on economics and promise of a pause risks playing into a yearning for sunnier alternatives.

Many underlying price pressures, such as wages, are proving persistent in the face of rate hikes. Meanwhile, uncertainty over the state of our federal finances is growing. Former Bank of Canada Gov. David Dodge recently issued a report concluding federal deficits are unsustainable for the decade ahead.

The Bank of Canada is a sophisticated and historically patient institution and its latest announcement certainly poured cold water on the idea that it is a blind follower of the Fed. Without further comprehensive employment and consumer price reports for a while, the central bank is probably just trying to temper expectations — but markets and the public are never that rational.

Einstein once famously defined insanity as doing the same thing over and over and expecting different results. In the 1970s, after a temporary ease, inflation bit back more harshly than ever, with prices dropping then soaring — graphically looking like a McDonald’s M — with drastic quantitative tightening eventually bringing them under control. Former Fed Chairman Paul Volcker is remembered as the man who saved the global economy, but was seen far less favourably at the time.

Having found the nerve to raise interest rates to battle inflation, the Bank of Canada must now hold it in the face of frenzied appetite for them to come back down. Should Macklem end up reneging on his conditional commitment, I am confident he will do so firmly and without fear of reprisal with monetary and historic responsibilities as his north star.

We have seen the Conservatives and the NDP quite willing to target the Bank of Canada. Although Macklem was clear this was a conditional commitment that fact will inevitably get lost as more Canadians struggle to make their mortgage payments.

Before their next rate announcement in March, it would be best if the bank worked to drown out the noise that will precede it and aggressively assert that a pause will only come if specific criteria are met, and that more hikes may have to follow if they are not.

Failure to do so will put Canada in a very difficult position to tackle inflation and failure to do that will result in pain for generations to come.

This article first appeared in the Toronto Star on February 6, 2023.