Being delicate isn’t the top priority at this stage for the Bank of Canada, as the task of stomping down inflation continues to grow
by Statistics Canada, probably cemented a 75-basis-point rate hike by the Bank of Canada at its next rate decision in mid-July – which would be the bank’s biggest single rate increase since 1998.The central bank has said repeatedly it wants to quickly get its key rate at least up to levels it considers “neutral” – i.e. where its rate neither stimulates nor inhibits economic activity. It estimates the neutral rate to be somewhere between 2 and 3 per cent.
The U.S. Federal Reserve is also scheduled to set its key rate two weeks after the Bank of Canada’s July announcement, and looks poised to make its own jump to 2.5 per cent. The Bank of Canada might want to pre-emptively keep pace with its U.S. neighbour before checking out for the summer. It should be possible, at least arithmetically, to do that without triggering the kind of employment slump that is a hallmark of any true recession. As, Canada had nearly one million job vacancies in the first quarter, at a time of 50-year low unemployment – evidence of an enormous gap between labour supply and demand. Bank of Canada officials have said that this leaves a lot of room to dampen demand – like, a million jobs worth of room – before you start hurting employment appreciably.
But just because the numbers work doesn’t mean that engineering such a feat is easy. Far from it. And any central banker will tell you – it’s so commonly understood that it’s almost reflex – that interest rates are a blunt instrument. They are not at all well suited to the delicate economic surgery that we’re trying to perform here.
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