The Bank of Canada has to raise interest rates – even if monetary policy can’t unblock supply chains
The Bank of Canada is going to start moving aggressively against inflation on Wednesday, likely raising its benchmark interest rate by half a percentage point. And it won’t be stopping there. The bank, along with the U.S. Federal Reserve, is almost certainly going to hike several more times this year.On the one hand, there was always going to come a time when the Bank of Canada and the Fed would have to end their superstimulative pandemic monetary policies.
For example, your local car dealer may not have a single new car on the lot – and that issue of lack of supply, owing to production bottlenecks such as a microchip shortage, is not something amenable to resolution by higher interest rates. But on the other, other hand, there are signs that some inflation may be starting to moderate. For example, though the U.S. consumer price index is up 8.5 per cent over the past 12 months, a lot of that was driven by gasoline – up 48 per cent year-over-year – and used cars, up 35 per cent.
Mentioning a recession at this moment may sound like fretting about frostbite during a heatwave. But earlier this month, a Wall Street Journal survey of 65 leading economists gave better thanCrazy talk? In normal times, yes. But economic heatstroke and hypothermia can, in rare instances, cohabitate. They did in the 1970s, during a period of spiking energy prices known as stagflation.
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