Canada’s normally calm central bank admitted it has no clue what it should be doing right now. The Bank of Canada (BoC) held its key overnight rate, but made it clear this isn’t the usual sign of confidence in a stable economy. Warning of the threat of dual shocks to energy and global economic growth, the Governor’s opening remarks made it clear that he felt uncertain about what comes next. Heck, close to 1% of the words in the Governor’s opening remarks were literally the word “uncertain.”
BoC Overnight Rate Unchanged, Not a Usual Sign of Stability
The BoC held at 2.25%, at the low end of the neutral policy rate—a level it’s been at since October. The bank cited headline inflation at 1.8%, and 3-month Core CPI measures down to 1% annualized. Weak readings like this would typically spur cuts, especially when accompanied by the central bank’s concerns about the labour market and slow GDP.
Stable interest rates are typically a sign of a stable economy, but this isn’t one of those “mission accomplished” moments. The BoC sees stable economic growth, but it’s clearly not stable enough to dampen concerns regarding shock absorption. It’s effectively in a policy stalemate, where cuts risk reigniting inflation and a hike would penalize the economy. This marks a shift from active policy to a conditional pause with the risk of tightening.
Yeah, tightening. Those low inflation data points may not stick around for much longer.
Bank of Canada Really Wants You To Know It’s Uncertain, Says It 6x
If you took a drink every time the BoC mentioned it was uncertain in its opening statement, you would need medical attention. On average, the Governor mentioned it every 128 words. It was a clear shift for someone who just a few weeks ago told business leaders the whole country should reroute its supply chains, arguing it wasn’t a choice.
“The Canadian economy continues to face heightened uncertainty related to US trade policy and geopolitical risks,” explains BoC Governor Tiff Macklem. A notable departure from his certainty just a few weeks prior that Canada’s era of trade with the US is over.
The Governor then warned of a new risk layer: “Now the war in Iran has added a new layer of uncertainty.” The conflict’s consequences have spread far beyond the Middle East, with the BoC suggesting it presents a dual shock risk. They see higher oil costs potentially driving inflation, while the conflict simultaneously presents a risk to demand, slowing global growth.
Notably absent from the speech is the normalization of energy prices from the CPI index. The BoC initially warned that the removal of the carbon tax would temporarily reduce headline CPI by 0.7 points for a period of 12 months. Those 12-months are coming up fast… and furiously, removing the temporary suppression by this April.
Bank of Canada Has No Clear Path Forward, Suggests Reactive Policy
Shocking, the BoC isn’t clear on the path going forward. “Its impact… will depend on how long the conflict lasts and the extent to which it spreads,” warns the Governor. “In its monetary policy deliberations, Governing Council is considering both the most likely path for the economy and inflation, and the risks to our outlook.”
Without stating it, the narrative presented is a concern of stagflation—a recession where prices rise. The BoC further made it clear that “we stand ready to respond as needed,” suggesting a departure from the policy of the Ghost of Governors’ Past.
The market takes between 18 and 24 months to reflect monetary policy changes. That makes it a terrible tool to address economic shock, but that’s exactly the plan it’s presenting. The risks presented also strongly indicate the skew is towards a reaction rate hike, potentially restricting credit at a crucial time when the exact opposite may be needed.
Think of it this way: for the BOC to flip narrative this fast, things have to be a lot worse than they’ll ever admit.
A wise man once said, “In Tiff’s Bank of Canada, it gets worse than you die.”
He’s going to be crying for rate cuts soon. Mark my words!
If you think that we will see housing prices go up and stay there . It won’t happen . When liberals win their majority. More taxes coming …Guess what they will tax ?
Actually it is surprising given the deep malaise in Canada’s economy today, with no job creation since 2024m declining output on everything, that they didn’t make another cut. They can drop to 200bp and still be neutral….
The problem is, and its a big one, Stats Can can fudge the interest expense numbers, but a material increase in Gas prices and a guaranteed increase in inflation in April regardless is showing that he is more afraid of getting caught with a 4-6% CPI than helping regular Canadians.
Another big issue is the complete lack of any sort of plan from Carney and Co for the housing defaults that are starting to pile up. The feds should be working with the banks to establish a way for people to keep their homes, and not set off a major selloff in housing, but apparently that is not a priority
I believe that 3 things should be inferred from this announcement, The first is that after 30y of using the overnight rate to ‘control’ inflation, it no longer works. Secondly, that an alternative method to manage inflation by controlling credit and monetary expansion as a function of GDP growth is likely the next big thing to use. Finally, that central bankers are not competent to manage much of anything, including monetary policy. The simple fact that we seem caught in an endless loop of exponentially larger boom and bust cycles shows that the central bank is NOT doing its job, nor is the federal govt.
On the first point the founder of MMP and Chicago school, Milton Friedman, stated clearly in 1963 that ‘Inflation is everywhere and always a monetary phenomenon’. To make this simpler to understand, the root cause of inflation is not supply and demand driving prices higher, as the capitalist model suggests, but a over supply of money that ‘depreciates’ the value of money. Therefore, while ostensibly, the role of the BoC is to control the expansion or contraction of the credit based money supply using the demand control of higher or lower rates to make borrowing money less attractive.
The problem is, demand for credit (or just money’) is highly inelastic. People will borrow money at very unfavorable terms, despite knowing they cant afford to repay it. So therefore using the overnight rate to control that demand is in effect, bankrupting governments, consumers and businesses? So not a very effective tool. But as we witnessed in 20098, this is exactly how it works. For example, with 90 day mortgage delinquencies rising exponentially in Canada, and literally no action from Ottawa or the BoC to address what will soon be a massive wave of credit defaults, this is how the current draconian system deals with negligent and chronic mismanagement of the Monetary system.
Now, if we know that inflation is caused by the monetary system, and that equipping the BoC with only one tool to deal with that isnt working, what would address this. The problem, as noted above, is that by the time inflation hits the headline CPI in Canada, it likely means we have seen years of monetary oversupply in housing, govt spending, and consumer credit expansion. For example, the M3 Broad money index in Canada has more than doubled in the last decade which is a 7-8% growth in the M3 since 2015. Canada’s gdp has only grown by 31% since then. So we have a 70+% difference between the growth in output and the growth in the M3. This is exactly how you get inflation, which we have seen in housing since 2016, and ini everything else since 2021.
Prof Krugman of Princeton stated that a better way to manage this than the overnight rate was to manage this ratio, m3 vs gdp growth.
Now, no one wants to do this, since it would be a brake on lending when GDP slowed, which is counter intuitive. An expansion of lending when the economy is low is how everyone seeks to rebuild the economy. However, as we saw in Canada between 2009-2015, the expansion must be curtailed once the recession is addressed. Instead in Canada, no one has even tried to reduce credit expansion since 2916? In recent years, key officials went as far as to say that overvalued real estate prices must be protected at all costs? The only way to do that is to continue to create exponentially larger debts to finance them, which causes more inflation.
This leads to the final point whihc is that when you have a govt that is well aware that they are creating inflation through uncontrolled monetary expansion, and when they get stuck (think Freeland in 2022), they either claim that its not so bad (vibecession??) or that they will continue to expand the money supply to keep the good times going for another election cycle. Now we have a self nominated expert on monetary policy in the |PMs chair, one would expect some good ideas from him and the BoC. Yet so far, it seems they are mainly interested in diverting attention from the upcoming carnage from widespread credit defaults to buying guns, diversifying trade, and govt spending.
Now both Carney and Maclem should know the end of this game is a nasty recession. Trying to exchange a major trading partner with whom 75%+ of our trade is now with is going to cost a lot of money. It will take decades, and require a massive public sector investment in ports, rail, roads. As of today, none of that is happening. Its a great deal of hot air, and nothing that will make any of these changes.
While the various wars in Europe, the middle east are going to potentially cause price shocks in oil, and shipping, its the underlying weakness of Canada’s battered economy that is causing inflation. In November Trump faces a serious test of his power, in addition to the judicial opposition so far. So Carney/Macklem are going to need to find a new diversion fast. Its unlikely that the USA will escalate the war in Iran, since they are in no way interested in putting men on the ground in Iran. So pretty soon all the easy targets will be gone, and the war will end. Canada’s problems are just getting started…..
So
There are two disappointing parts to the BoC since last year. First is the clear interdependence between the feds and the BoC. DFGor Macklem to start telling us we need to diversify away from the USA is outside of the scope of his role. Secondly, anyone with even a passing understanding of economics will tell you that it will take decades to unwind our interconnected economy with the USA and Mexico. Finally, there is zero evidence that this massive transition and investment will either be effective, nor is necessary.
The even bigger question is, if Canada had ignored the Liberals hyped up ‘Trade War’ narrative and put anyone else in to negotiate with Trump, we would not even be here. Mexico has been very successful, despite much more anti Mexican sentiment in the USA, at negotiating with Trump than our current govt has, both now and back in 2017. Freeland was lucky that she was able to insert herself in the final deal between Mexico and the USA last time, and now Carney seems unable to even get that much engagement from Washington or Mexico. So the question should be is this really an economic war or a political one? I believe that any impartial view would say the later.
So if we are in this trade mess because of the LPC, why is it that the BoC is supporting their false narrative? Secondly, if Macklem believes that this is necessarym as he saiud 2 weeks ago, what can he do as BoC gov to prtepare Canada for this transition so its not another decade of lost GDP, Lost standard of living.
This is the final point. In 2015 we had a new PM who set us on a ‘green transition’. After a decade of that, we saw that the middle class was close to extinction in Canada, that we had lost pretty much all foreign investment, outside of money laundering, and hadn’t seen any growth at all from the green sector, despite wasting hundreds of billions on subsidies? The first act of the ‘new/old’ PM was to cancel the carbon tax and ridiculous quotas on EVs? Now, given that Mrt Carney was a major cheerleader for the first, failed transition, what possible reason is there to believe he is right about diversifying trade? absolutely none. His entire claim to fame was being Harpers tool in 2009. On his own, he has failed to do much of anything that worked out…
passed over twice for Carney and Poloz , he couldn’t do it then and he can’t do it now , you are promoted to the the highest level of your incompetence , we are there now
Well argued, Stephen, but I am not sure you are right about the need for stimulus. First, the CPI inflation rate for January and February was 3.0% for the CPI excluding gasoline. The Bank of Canada may have cited “3-month Core CPI measures down to 1% annualized”, but CPIX, CPI-trim and CPI-median all are showing the annual inflation rate at 2.3%,still slightly above the target rate.
I sent Shaun Richards, who runs the British blog Notaysemanseconomics, some details of the BoC interest rate announcement. He responded in part: “Your comment led me to have a look at the money supply figures and the narrow M1 numbers look very erratic so let’s stay with M2 or M2++ as the Bank of Canada calls it. The annual growth rate is 5.9% but the last three months have been 10.1% which means there already was an inflation risk for mid 2027. That gets more awkward if we get a sustained inflationary burst in the meantime.” None of the journos at the press conference anything about money supply growth. It seems to be something that gets more attention in Britain than it does here. Shaun also said: “Plus whilst Canada starts with a higher interest-rate than in 2021/22 the issue is that if I look Internationally the US is at 3.75% and Australia has just raised to 4.1%.” Of course, 3.75% is the top of the US federal funds rate range, from 3.5% to 3.75%, and the Bank of England bank rate is also at 3.75%. Arguably, the Bank of Canada is already providing more stimulus than these other central banks. Would it really be a good idea to provide yet more stimulus now? Macklem is the same man who gave us an 8.1% CPI inflation rate in June 2022. Be careful what you wish for Stephen. You just might get it.