One of Canada’s largest banks is sounding the alarm on excessive easing at the wrong time. The Bank of Canada (BoC) slashed its key policy rate earlier this month, despite warning of rising inflation approaching its tolerance. A new report from Scotiabank outlines how the central bank has been disregarding rising inflation data, and rushing to stimulate demand. They warn the BoC isn’t just abandoning its mandate, but also squandering its primary resource to respond to tariffs and rising inflation. The move isn’t just a reckless approach but risks amplifying a downturn.
Bank of Canada Now Limited In Its Ability To Further Cut Rates
BoC slashed rates despite knowing that inflation would rise in the coming days. The central bank slashed its overnight rate by 0.25 points to 2.75% earlier this month, noting expectations for inflation were elevated. It was criticized as excessive easing, and appeared even more absurd when CPI came in higher than their expectations just a week later.
The hard-to-justify cut makes a repeat even more absurd. “Canadian inflation spiked higher and further reduces prospects for additional rate cuts by the Bank of Canada,” writes Scotiabank economist Derek Holt.
BoC Expected Inflation To Accelerate, No Indication of Disinflation
There’s some discussion that CPI’s increase was transitory due to the sales tax relief. The sales tax holiday ran from mid-December to mid-February, temporarily suppressing CPI for roughly 10% of measures. It was expected that a return to the norm would push CPI higher, and it did. However, the contribution to inflation was just a tiny part of the acceleration seen in the latest data.
Holt’s calculations show the spread between CPI and CPI excluding indirect taxes (i.e. GST/HST) was 0.37% in February, representing just three-tenths of the 1.1% monthly growth overserved. Removing the sales tax holiday will add another 0.3-0.4 points next month, pushing CPI above the central bank’s tolerance.
Unfortunately, this isn’t a new trend—the central bank had a front-row seat for the past few months. The BoC-preferred Core measures of inflation reduce volatility by eliminating the most volatile components, and exclude taxes. Over the past few months, this measure has accelerated quickly and wasn’t temporarily suppressed by the sales tax holiday.
“Core inflation has yet to show a convincing pattern of lagging disinflation to the emergence of a small amount of slack in the economy and that should merit the BoC ending cuts for some time especially amid the looming effects of tariffs on inflation and rising inflation expectations,” explains Holt.
Adding, “… This latest reading is no flash in the pan… They [CPI readings] are simply too hot and have been too hot in a long stretch back to last May,” warns Holt.
Bank of Canada Not Following Mandate, Unclear What They’re Doing
The rise hasn’t been concentrated to a few segments, as the narrative often goes. Scotiabank notes the “worst possible combination of effects” are now in play. CPI’s acceleration was broad-based, which was observed across categories—a sign of excessive monetary easing. They also note that shelter is often used as an excuse, but it wasn’t a major contributor either.
Unsure what the heck the central bank is trying to do? You’re not alone. “…[We] question why the BoC—an inflation-targeting central bank—has been in such a rush to cut to 2.75% for 275 bps of easing to date,” writes the bank.
The BoC abandoned its mandate, similar to its mistake just a few years ago. By blowing its firepower to overstimulate the economy, its ability to respond to any economic shocks will be limited. That can be a very dangerous and reckless setup if the trade war isn’t promptly resolved.
Bank of Canada knows Statistics Canada cooks the books by including interest costs in its CPI calculations, so it doesn’t have to “fight” inflation. It can lower the cost of interest and inflation magically lowers.
Tiff couldn’t even give a proper BS answer on why he would do it, but I honestly don’t think they care about public accountability now.
Most important part is the Big Six almost unanimously said the lack of bps on yields and strength of CAD was odd. No one in the market thinks the strength makes sense, which probably means the BoC and their fund-proxies are now working together to undermine market mechanics.
That will work unless it has to persist for any extended period, then the problem commpounds.
Canada’s left are the bankers. Its right the corporations. Winter is here.
The misguided BOC is forcing the value of the Canadian dollar to decline against other currencies by lowering the interest rate well below the US Federal Reserve’s interest rate. The higher interest rate available in the USA is causing investor’s money to leave Canada, weakening the Canadian dollar. The BOC is also eliminating the “wiggle room” it needs when the economy seriously needs stimulus which isn’t needed yet.
They are simply trying to stimulate the real estate market. The coming real estate crash is a nightmare they do not want. Mass unemployment and a massive reduction in spending is on the cards, once the market starts to crash.
Yes. On a situation they caused. While being charged with the responsibility to prevent. Not just housing, but M&As, stocks, govt debt, etc. Along with CBs elsewhere too. Decades of huge monetary leadership fail. Now thinking they can jerk rates around to effect fast fixed on their fails, despite the lag times and despite the loss of confidence and trust in their responses. Their charter and legislative enforcement needs review.
Don, we’ve been hearing about the impending real estate crash for 30 years now. If I can take my cap-rate-8 property that is overpriced and rent out the 4-5 apartments in it and not lose money monthly, will it be worth less?
If new people in Canada can’t find a place to live, because the houses are 100k overpriced, will they choose to live on the street?
On what planet are you getting an 8% yield? Because it’s not earth, never mind Canada.
These greedy banks just look for their profits. They don’t know how the general public is feeling these days. We need atleast 50 basis point cut in April to move the real estate market a little bit. Resale is stuck for the last 6 Months and the inventory is piling up day by day.
Screw the real estate catering to fools like you got us here. Thanks.
House prices must be supported at all costs.
The economy is dependent on house prices and interest rates need to be lowered more to ensure that prices rise. Canadians depend on their investment to increase in value and the Bank of Canada understands this and will do what is necessary to protect our investments in housing.
It’s not that difficult to figure out, Canadian economy is extremely sensitive to interest rates, lowering them will prop up the economy and they think this is more important right now than fighting inflation.
No one wants to say the words stagflation. The US tariff regime will make this worse.
The Canadian dollar is going to tank