Most Canadian Businesses Think The BoC Lost Control, BMO Sees Wage-Price Spiral

Canada’s central bank is quickly losing credibility, according to its survey. The Bank of Canada (BoC) Business Outlook Survey (BOS) for Q4 2021 shows businesses expect high inflation for years. Elevated expectations show they don’t see the BoC in control of its inflation mandate. As a result, most businesses are preparing to raise wages higher to face the increased cost of living. This would cement high inflation, and is the beginning of a wage-price spiral, according to a Big Six bank. The bank now expects earlier rate hikes, as the BoC battles inflation and a loss in confidence.

Most Businesses Believe The Bank of Canada Isn’t In Control

Most Canadian businesses don’t believe the BoC can execute its inflation mandate. The BoC Business Outlook Survey shows 67% of businesses see inflation above 3% for two more years. A central bank’s primary mandate is inflation control, with the BoC targeting 2%, with 3% being the limit. Businesses don’t see that happening in the current environment.

Bank of Canada Business Outlook Survey: Inflation Expectations Above 3 Percent

Consequently, most businesses see lifting wages more than usual in response. The same survey found 71% of firms will raise wages more than typical to offset the cost of living. The CEO of RBC said if this exact scenario happens, high inflation becomes permanent. Once wages adjust to a non-productive increase, we don’t roll them back.

Canada Is At The Beginning of A Wage-Price Spiral

Another Big Six bank sees this as the beginning of a wage-price spiral. A wage-price spiral is when the cost of living and wages continually drive each other higher. A higher cost of living requires higher wages and higher wages produce more expensive goods and services, aka a higher cost of living.

They non-productively drive each other higher, meaning no one benefits from this increase. Economic output is unchanged, and it has no positive influence on consumption. Since CPI underreports inflation, workers most likely lose bang for their buck.

Canada’s oldest bank sees the first signs of a wage-price spiral beginning to form. “The tight labor market is driving more than half of firms to anticipate wage hikes, with nearly half of firms citing cost of-living adjustment as a driver of rising wages. That’s what the start of a wage/price spiral looks like,” wrote Benjamin Reitzes, BMO’s head of Canadian rates and macro strategy.   

BMO Expects Faster Rate Hikes To Prevent A Spiral Out of Control

BMO believes the central bank is observing this and prepared to respond. This has accelerated their rate forecast even earlier than previously expected. “Following the shockingly strong BOS, and keeping the housing and inflation data top of mind, we’re now expecting that the Bank of Canada’s first rate hike will come in March, one month earlier than previously,” he wrote. 

BMO now expects a full rate hike in March, the first of five they’re forecasting this year. Increasing the overnight rate by 25 basis points (bps) would double the current rate. Another four hikes will follow, with the last of the year occurring in October. In less than a year, they see the overnight rate more than 5x its current level.

For context, BMO sees the first rate hike occurring later than JP Morgan. America’s largest bank sees the first hike occurring on the 26th of January. BMO sees the last hike occurring before most other banks. While BMO expects October to be the peak for the year, other banks currently see the last hike in December. A later start for hikes, but a smaller window for them to occur over. 

In any case, the urgency to increase the overnight rate is rising very quickly. In 2020, a panicked BoC made rapid cuts to the overnight rate to avoid a deflationary spiral. Now they’re facing the opposite, an inflationary wage-price spiral. Along with eliminating moral hazard, they now have to prove they can control the money supply. Failing to do that can have long-term consequences to global-investment. That would be a much bigger issue than failing to help home prices rise 30% year-over-year.

14 Comments

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  • Ethan Wu 10 months ago

    All politicians see are data points to use in elections. “high wages, higher home equity!”

    They don’t consider lower consumption, shrinking per capita GDP.

    • Fazid 10 months ago

      This is the secret to understanding policy. The only employment they’re interested in managing is their own.

    • D 10 months ago

      They don’t consider the rotten meat and produce being sold by supermarkets and groceries.

    • Yusef Wess 10 months ago

      I believe this was covered on BD at some point as well. Politicians are lucky Canadians don’t understand the difference between per capita GDP and aggregate GDP growth. People get the governments they deserve.

      • Rand Passmore 10 months ago

        How much danger of stagflation is there? Is the current rate of inflation being seriously underestimated? We know too that the big banks will look after themselves first. This could all spell trouble for us average folks.

  • C.Rose 10 months ago

    The BOC main concern over the last year is financing the Liberal spending machine- who else is going to buy our government debt- they are not concerned with inflation. There is political pressure to keep this charade going.

    • Trader Jim 10 months ago

      Yes, even though right on the homepage of their website the first thing is “We are Canada’s central bank. We work to preserve the value of money by keeping inflation low and stable.”

      It should say, “We are Canada’s central bank. We do whatever we’re told.”

      • D 10 months ago

        It should say we do whatever the Bank of England and Federal Reserve tell us to do. Canada remains a colony and not a nation.

      • Jimmy 10 months ago

        I didn’t believe you when I read your comment, but there it is, right at the top. The very first sentence on the BoC homepage.

        Mind blown.

        Thanks Trader Jim. I hate that I was a doubting Thomas.

        Daniel, nicely worded last paragraph to the article to sum it all up. Well articulated.

        Jimmy

  • D 10 months ago

    The talking heads said that Canadian households were struggling because of lowered wages but for the past 2 years I keep hearing how wages have been increased. Which is it?

    • Recruiter Man 10 months ago

      Wages are rising but not keeping up with inflation. Both statements are accurate. Net net, households are worse off.

      • Rand Passmore 10 months ago

        But some households are doing sort of ok while others are really becoming a new underclass. Pity the poor renters who may be trapped in a newly created home hell.R

  • Eric 10 months ago

    Inflation is exactly what Trudeau and his rich buddies want. If everyone is impoverished except for the ultra rich, then he can make us all slaves, and have 100 percent control of everything we we see, hear, think or do. Speak out against it, and you will get cut of from the basic necessities of life so you can starve or freeze to death. Quebec’s vaccine mandates are a trial run.

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