To fight inflation, bank rate hike must happen in March

Bank of Canada

It’s time to tackle the inflation that is undermining our living standards

By Miguel Ouellette
and Olivier Rancourt
Montreal Economic Institute

Despite the recommendations of many economists to raise the target for the overnight rate, the Bank of Canada has decided to maintain the status quo – at least for now.

Like these experts, we believe that the central bank must begin gradually raising rates at its next announcement on March 2.

Given the adverse economic effects of Omicron-related measures being felt across the country, and inflation hitting a high of 4.8 per cent in 2021 – a level not seen in 30 years – the fight against this seemingly persistent inflation must become a top priority, especially for the sake of the middle class and the less fortunate.

While it’s understandable that the different levels of government had to increase public spending to come to the aid of the population and of businesses, the pandemic must not be used as a pretext for pushing a more interventionist agenda, ignoring the negative effects on Canadians of a marked increase in the money supply used to finance deficits.

When the central bank expands the money supply – also known as “printing money”– to finance public spending in the form of direct transfers to individuals and businesses, consumers’ purchasing power initially increases. As a result, overall demand for goods and services increases, which pushes prices up to a higher level.

If the money supply increases faster than a country’s economy, inflation is accentuated. Combine all that with very low interest rates and with restricted supply due to various health measures and global supply chain disruptions, and you have a perfect cocktail of explanations for the record inflation we’re experiencing today.

For a doctor or CEO, inflation is just one problem among many: after all, they can cut down on their consumption of luxury goods. For the middle class and the less fortunate, however, a persistent increase in the price of food and housing has a real impact on their daily lives. Let’s be clear: Inflation is one of the most vicious and regressive hidden taxes.

In order to reduce the real impact on Canadians, the central bank must absolutely raise its target for the overnight rate, and our governments have to re-establish greater budgetary rigour.

By raising the key interest rate, the Bank of Canada will slow down consumption, slowing the sharp increase in prices.

It’s simple: If interest rates on our savings are higher and the cost of borrowing goes up, our incentive to save rather than spend will increase. The prices of goods and services, including those on the real estate market, will therefore stabilize.

By returning to greater budgetary rigour and phasing out temporary measures related to COVID-19, the federal and provincial governments would cease stimulating the overall demand for goods and services and encourage the central bank to slow money creation.

Our policy-makers have to take the situation Canadians find themselves in seriously. It’s time to tackle the inflation that is undermining our living standards.

Miguel Ouellette is Director of Operations and Economist and Olivier Rancourt is an Economist at the Montreal Economic Institute.

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