The kings of Bay Street aren’t happy with Canada’s central bank, and they’re no longer holding back criticism. Four of the “Big Six” banks have recently urged the Bank of Canada (BoC) to raise the overnight rate. Another bank hasn’t urged action, yet. However, they’ve warned consumers of the risk of buying a home at this particular time. The BoC should be supporting the banking system as one of its primary goals. It appears the banking system now sees the BoC as reckless, and has begun to distance themselves.
RBC: Inflation Isn’t Transitory, Multiple Rate Hikes Needed Soon
Canada’s largest bank is the latest to urge the BoC to raise interest rates, and they did so with its top brass. “This is permanent, sustained inflation that has to be dealt with through monetary policy, and therefore we need rapid action this spring as a series of rate increases to address it,” said RBC CEO David McKay to Bloomberg News this week (Jan 11).
The executive warned wage increases aren’t transitory. If high inflation drives wages higher, the inflation is now priced in. It can’t be transitory. We don’t roll back wages, and they can’t roll back prices once wages adjust.
Higher wages might sound great, but if they’re higher due to the cost of living, the benefits are negative. Not only are you not getting more purchasing power, but inflation is underreported. The result can be wages rising substantially, but not enough to cover the cost of living. Reduced consumption, lower future purchasing power, and devalued existing capital.
BMO: It’s Not A Supply Issue, The BoC Created A Demand Issue
Economists at Canada’s oldest bank were amongst the first to sound the alarm on the BoC’s easy credit. BMO chief economist Douglas Porter publicly questioned the central bank’s moves starting on Oct 25, 2021. “… [the BoC’s] current ultra-stimulative policies look far out of step with red-hot housing, record equity markets, decades-high inflation, and employment back at pre-pandemic levels,” he wrote in a research note to the bank’s capital markets clients.
Adding, “…There simply is no justification for such extreme stimulus at this point.”
BMO also pinned the reacceleration of home price growth on the BoC recently. They argue it’s no longer a lack of supply but excess demand created by the overabundance of easy credit. “It’s telling that the biggest share of transactions, according to Teranet data, is now investors,” the bank said in another note, suggesting interest rates should have been climbing a year ago.
National Bank: The Bank of Canada Is Jeopardizing The Recovery
National Bank of Canada (NBC) has arguably been the most critical of the BoC’s policy recently. From the BoC discrediting its own inflation research to ignoring employment benchmarks it set for itself, they’ve questioned the bank for the past year.
“… maintaining such a loose policy standing much longer risks compromising Canada’s longer-term economic and financial market prospects,” warned NBC in a research note sent to clients in early December.
CIBC: Buying Canadian Real Estate Is Risky Right Now
CIBC isn’t calling on the central bank to do anything, but they warned Canadian real estate buyers. “I think there is a risk of getting into the market at today’s rates,” CIBC deputy chief economist Benjamin Tal warned in Nov.
“We are still dealing with emergency interest rates. Let’s remember that these are not normal interest rates, and eventually, they will rise,” Tal added. As rates rise, credit cools (ideally), making home prices a little more unpredictable.
Scotiabank: 8 Rate Hikes Needed To Cool Inflation
Scotiabank is never quite as in your face as RBC, BMO, or National Bank. Still, they have doubts inflation is transitory, and forecast 8 rate hikes to curb it. “We still view the supply disruptions as temporary, but they are clearly more persistent,” wrote Perrault, an economist with the bank.
Adding, “muddying the inflation outlook further is an increasingly blurry distinction between supply-related challenges and those posed by strong demand.”
“If inflation rises more rapidly than we expect, we may need to forecast an earlier tightening along with a potentially higher 2023 endpoint,” read their outlook in December.
The BoC’s sole job is to ensure inflation is close to the target and facilitate liquidity at commercial banks. When commercial banks begin to say the BoC is providing the system with too much money, we have a big problem. The central bank is no longer following its mandate to help ensure liquidity. It’s executing a politically motivated agenda — the opposite action of a sound money issuer.