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Op-ed originally published in the Toronto Star on Oct. 4, 2023
Lana Payne and Rob Wildeboer
The Bank of Canada has raised the interest rate 10 times in 18 months. It’s the steepest rate hiking campaign in modern history. It’s time to hold fire.
The fact is inflation has come down quite dramatically in that time period from 8.1% in June of last year to 4% this August. Remove mortgage interest and volatile energy costs from the data and recent inflation is tracking at about 2.3% - let’s face it, the battle is pretty much over.
Monthly inflation might have jumped, but the economy is showing multiple signs of weakness. The unemployment rate is rising, consumer spending has stalled, investment in new housing is tumbling, economic growth is hovering around zero and employment indicators show an increasing level of precarity in the labour market.
Globally, central banks tried to ease the public’s fear of recession by committing to aim for a soft landing as they began raising interest rates early last year.
The problem is central banks are notoriously bad at engineering soft landings. In fact, we wonder if one has ever been successful. By this point in history, overdoing monetary policy should be avoidable.
Barring further catastrophe such as another war or climate event that causes a short-term surge in prices, inflation will continue to ease. Even if the Bank did nothing from here on, the inflation rate is likely to hit 2% by next year as the impact on mortgage payments will have largely run its course.
From a macro perspective, a soft landing is still possible. The Bank could be successful in avoiding a recession, but on their part, it requires confidence in their actions to date, consistent messaging and steely persistence in order to engineer that outcome.
At the micro level the landing is anything but soft. For the multitude of families who are paying higher interest costs or rental rates while also trying to afford the escalating cost of food – which has soared despite the rate hikes - economic hardship is an every day event.
Mortgage interest costs are one of the most significant contributors to inflation right now – meaning the Bank of Canada’s actions are actually stoking the inflation they are trying to extinguish. Diverting household spending from groceries to interest payments does not reduce demand for food but it does increase hunger and stress.
Borrowing costs are making it much more expensive for business and government to build the things this country so desperately needs like affordable housing, manufacturing capacity and the equipment and facilities that will help to both solve production logjams and decarbonize the economy.
Investment decisions are being made now that impact Canada’s future. High interest rates are impeding Canada’s ability to achieve those goals.
Government spending and other policy prescriptions are not necessarily a barrier to inflation relief and government has recently come to the table promising to use all the tools at its disposal to help rates come down quickly. The interest rate is only one blunt tool of many that could be put into action to ease the affordability crisis while inflation continues to fall. Instead of relying solely on the interest rate, Government and the Bank of Canada need to work together to set the right policy mix to make life more affordable for Canadians.
Investment in affordable housing, vigorously enforcing the Competition Act to reduce price gouging and fully implementing universal dental and pharmacare are just some of the tools at government’s disposal to bring prices of certain goods and services down.
Canada’s infrastructure deficit certainly hasn’t helped on the inflation front. Spending on business-enabling infrastructure does not only provide for a prosperous future, but it is also a remedy for today’s clogged supply chains and related price pressures.
It is past time for the Bank of Canada to ease its rhetoric on inflation and the interest rate. It needs to go on hold and allow other policy tools help with the heavy lifting – further interest rate tightening is almost sure to do more harm than good.
Lana Payne is the National President of Unifor. Rob Wildeboer is the Executive Chairman and co-founder of Martinrea International.
