One economist says B.C.’s premier risks indirectly influencing the Bank of Canada, or creating the perception of doing so, which could itself increase inflation.
British Columbia Premier David Eby said the Bank of Canada kept its key interest rate at 5% last week following a controversial Aug. 31 letter to the Bank of Canada asking Governor Tiff Macklem not to raise interest rates. He said he felt relieved after seeing it. .
Mr. Eby was the first Canadian prime minister to formally comment on the bank’s politically independent policy deliberations. Ontario Premier Doug Ford then voiced similar concerns about high interest rates and the potential for them to rise. Similarly, Finance Minister Chrystia Freeland has been criticized for expressing her views on the central bank’s deliberations that led to the September 6 interest rate suspension.
Eby told the Bank of Canada that further rate hikes would be “unsettling” for British Columbians.
In a Sept. 8 interview with Glacier Media, Eby primarily expressed concerns about mortgage costs for homeowners and speculation that the construction industry would delay rental housing projects, causing rents to rise further. He further emphasized the letter.
“It was clear to me, and I’m glad it was clear to the governor, that people are hurting. Many businesses are struggling with the debt they took on during the pandemic. They have lines of credit. “There’s a lot of people out there with variable rate mortgages who are really struggling when it comes to car payments,” Eby said.
“You have to keep an eye on him (Macklem) when he makes those decisions,” Eby said.
Mr. Eby told Mr. Macklem that while he relied on CIBC’s spokespeople and economists, he found it “disturbing” that the bank was considering further rate hikes. Benjamin Tull says we don’t need any more hiking.
Mr. Eby told Mr. Macklem, “In my role as governor, I strongly urge you to give due consideration to the impact that raising interest rates will have on human health, and not to raise rates further at this time.”
Eby, like some economists, argues that rate hikes (from 0.25% in January 2022) need to work their way through the economy. In other words, higher interest rates reduce the economy’s aggregate demand, which means less spending, which in turn boosts economic growth. The goal of the Bank’s monetary policy, which targets an inflation rate of 2%, is for price increases (and thus inflation) to move downward. So if more people renew their regular five-year mortgages at much higher interest rates, they’ll have less money to spend on goods and services (and thus put economic pressure on businesses).
Politicians need to be ‘always alert’ to ‘gray areas’, says professor
Eby’s letter to Macklem prompted questions and criticism from several quarters, including economist Rob Gilzo, who served as senior aide to British Columbia’s finance minister and deputy premier from 2017 to 2019. Ta.
Gilzo, who now works as an assistant professor of economics at the University of Toronto, has tasked politicians with potentially putting political pressure on Macklem.
Mr. Gilzo points out that Mr. Eby implored Mr. Macklem to maintain interest rates regardless of the economic conditions the bank was observing. He told Glacier Media this poses a risk of sustained or rising inflation.
“Inflation is based on the real economy, but it is also based on people’s expectations. When people perceive banks to be under political pressure, it can create expectations that banks are not tackling inflation. . And inflation expectations turn into actual inflation,” Gilzo argued.
Gilzo said the most concerning comments came from Freeland because his office technically has direct authority over the bank’s duties. Freeland wrote a letter to Macklem. He called the interest rate suspension “welcome relief.”
But Gilzo takes note of Eby and Ford’s comments. I also asked for a complete stop. Further rate hikes could cause indirect political pressure on Freeland (Ebeys Federal NDP colleagues echo Eby’s letter in their own letter to Freeland this month).
Stewart Prest, a political science professor at the University of British Columbia, said Eby has stepped into a “gray area” where banks need to remain independent of partisan politics. But he said politicians also need to communicate with banks about what they’re hearing about financial pressures in society.
“What we are more concerned about is when banks appear to be bowing in some sense to political pressure and making politically expedient decisions rather than fulfilling their mandate of price stability. .”
Presto said it has been decades since the central bank’s mission, or monetary policy, was called for by politicians.
“I want politicians to be careful not to go too far in criticizing banks,” Presto said, echoing Gilzo’s concerns about pressure on and from the federal finance minister.
“Where we really start to get concerned is when someone at cabinet level or the federal government, especially a senior cabinet minister, or even the prime minister, starts asking banks to take a certain direction,” Presto said. .
Mr. Gilzo said that in the face of political pressure, Mr. Macklem “demonstrated a very respectful attitude that the bank was independent.”
Mr Macklem said: “He virtually failed to respond to any lobbying from either the Prime Minister or the Treasurer. Frankly, this was the most inappropriate letter ever published.”
“The Bank of Canada is set up to be operationally independent. That independence is even more important when decisions are difficult. Decisions are difficult,” Macklem said on Sept. 7.
Economist refutes theory that rate hikes cause inflation
The second criticism Eby faces is the content of his letter, some of which Gilzo calls “misinformation.” The biggest concern was that Mr Eby claimed that rising mortgage payments were “directly causing further inflation”.
Bank of Nova Scotia economist Derek Holt issued a statement last week condemning those claims.
In fact, Macklem points to the fact that mortgage costs are the main cause of inflation, saying, “The single price increase that has the biggest impact on CPI (consumer price index) inflation is the mortgage cost. , and is rising as interest rates rise.” Fee. This is an increase of about 30% compared to a year ago. Excluding mortgage interest costs, CPI inflation was close to 2.5%, leading some to argue that inflation is effectively back on target. ”
But Macklem added: “While it’s true that mortgage costs might be lower today if we hadn’t raised interest rates, economy-wide inflation would have been a much bigger problem for everyone.” continued.
Macklem said that absent outliers such as mortgage costs and gas prices (which are very likely to rise again due to global factors), core inflation is still around 3.5%. banks and many economists This winter, it will jump to 4%.
Macklem did not rule out the possibility of another rate hike in October or the central bank’s prospect of raising long-term interest rates. So if Mr. Macklem follows the impulse of politicians and suspends interest rates, it stands to reason that the risk of an even more aggressive rebound in inflation increases.
“Inflation remains rampant. Wage pressures remain trending high. On top of such deep-seated challenges to the country’s outlook, there is no need for governments to add central bank intervention to the list,” Holt said. said. According to Reutersled public criticism of Freeland, calling the interest rate suspension “a welcome relief.”
When inflation picks up, low-income earners will be hit hardest, according to consensus in the business community. us federal reserve system. Reserve note mortgage holders are in a better position to save by buying non-branded food and eating out less, but poor people facing inflation have nothing more to save. In B.C. Reports of homelessness increase and Food bank lines get longer due to inflation.
“There is no painless way to deal with inflation,” Gilzo said.
Mr. Eby speaks on behalf of the homeowner class.
Eby’s letter does not call on banks to fight inflation at all costs. Presto says this could raise questions about who Eby is speaking on behalf of.
Mr. Presto said it was clear that Mr. Eby was actually speaking to the middle class and wealth holders who are most affected by the very rate hikes that reduce inflation.
“It’s also very clear that he’s trying to speak the language of homeowners here. This is emblematic of a party that considers itself centre-left but a major obstacle to the centre.” Presto told Glacier Media.
Eby and his NDP MLAs fit that mold based on their homeownership rates, and then some, according to public property disclosures. Ninety-three percent of MLAs own a home, and nearly half own a second property..
“That’s a fair question,” Presto said in response to Glacier Media’s question about whether the political class can adequately address the state’s housing affordability crisis.
Ebby has recently identified as the lessor To exemplify his understanding of the tenant’s problems. But he put that honor behind him in March 2022, purchasing a $2.2 million townhome near the University of British Columbia.
Eby said his letter was not influenced by his or his party’s collective investments in real estate in B.C. Meanwhile, Presto said the prime minister’s motivations appeared to be more aimed at the homeowner voting demographic.
Eby’s letter also cited concerns that new rental projects are being “shelved” due to high interest rates (costs of financing), based on anecdotal information from developers.
So, according to Eby’s logic, rates need to be suspended or lowered to bring more supply to the market and alleviate continued rental cost increases.
“You can’t rent a rental unit that doesn’t exist. Then you’re competing with a smaller pool of rental units, which increases costs,” Eby said.
Building permits down from 2022, but up from 2019: StatCan
According to Statistics Canada, BC’s new housing construction permits for the first seven months of 2023 were valued at $9.1 billion. At the same time in 2022, a record year for construction due to pandemic delays, its valuation was $10.6 billion. New permits in 2019 were valued at $7.5 billion.
In the first seven months of 2023, permits were issued for 28,373 new housing units, compared to 31,121 new housing units during the same period in 2022. In 2019, 27,531 new units were approved.
But some economists agree that interest rates are too high, including those on the so-called left side of the political spectrum, such as the Canadian Center for Policy Alternatives (CCPABC).
However, the CCPABC also notes that to combat inflation, the B.C. They also argue that there is a need to significantly increase the number of Eby describes the effort in his book. CCPABC said the letters were submitted, although not at a pace fast enough to combat inflation.
Eby also told Prime Minister Justin Trudeau on Aug. 31 that senior governments can and must play a role in curbing inflation by improving the movement of goods and people. That’s why Prime Minister Eby called on Prime Minister Trudeau to increase spending on infrastructure.
“Keeping the economy, people, and goods moving requires the accompanying infrastructure: roads, rail, clean electricity transmission, and shipping ports,” Eby wrote.
Gilzo said it appears no Canadian government has obtained a memorandum on fiscal measures (as opposed to monetary policy set by the Bank of Canada) to control inflation.
“Either we cut spending significantly or we raise taxes significantly. We can do those things, but no one is seriously considering those alternatives,” Gilzo said. I did.
“If you try to deal with inflation, it’s going to be difficult. And you’re not going to get inflation under control unless you make tough decisions, whether it’s raising interest rates or fiscally.”
B.C. Opposition Leader Kevin Falcon told Glacier Media in an email that Eby’s letter to the bank was an “empty gesture.”
“While David Eby’s government is fueling inflation and doing nothing to make life more affordable for British Columbians in areas where he has influence, including provincial policy and taxes,” , it was complete hypocrisy to beg the Bank of Canada not to raise interest rates,” and his reckless spending decisions,” Falcon said.
gwood@glaciermedia.ca