The central bank held its policy rate at 5 per cent, but what is the end point for monetary policy, and what does that means for Canadians?
Jeremy Kronick is associate vice-president, and director of the Centre on Financial and Monetary Policy at the C.D. Howe Institute, where Steve Ambler, a professor of economics, University of Quebec at Montreal, is the David Dodge Chair in Monetary Policy.After two months of disappointment, with the annual change in the Consumer Price Index ticking up in July and August, inflation resumed its descent in September, falling to 3.8 per cent from 4 per cent.
And as inflation subsides, the bank’s policy rate rises in real terms, making monetary policy more restrictive even if the bank leaves its policy rate untouched. With the policy rate at 5 per cent and inflation at 3.8 per cent, the real policy rate, at 1.2 per cent, is already on the restrictive side.
The 30 to 35 years that preceded the pandemic were marked by falling real interest rates alongside a decline in the neutral rate. Globalization was an important part of this story as China flooded world markets with cheap manufactured goods, keeping bothand interest rates low. As the Chinese labour force expanded with a massive migration from the countryside to coastal cities, young Chinese workers saved for retirement. World savings were high, keeping the neutral rate low.
A similar demographic shift is happening in Canada, as the increased savings we saw as people moved closer to retirement reverses and these same folks leave the work force and spend their hard-earned money.
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