Many Canadian real estate buyers and investors are struggling with higher interest rates. They got some bad advice, not from a Realtor or mortgage agent, but the Bank of Canada (BoC). In a now infamous address in October 2020, Governor Tiff Macklem assured households that rates would be low for long.
Households and businesses are now facing a policy rate 15x higher than expected. It wasn’t just bad advice, the Governor willfully ignored how central banks work. This was a borderline reckless comment that likely clouded many of the following decisions.
Bank of Canada Assured Households & Businesses Low Rates Until 2023
At the October 2020 speech, Governor Macklem assured households access to cheap credit. He explained the central bank will hold the policy rate at the lower bound (0.25%) until the inflation target was hit. It’s one thing to give the public a timeline, it’s another to reinforce that timeline by assuring people it will be low for long.
“We’re going to hold our policy interest rate at the effective lower bound, until the slack is absorbed, so that we can sustainably achieve our 2% inflation target, and we’ve indicated that won’t happen until sometime in 2023. What does that mean? It means that if you’re a household considering making a major purchase… If you’re a business considering investing, you can be confident that interest rates will be low for a long time.”
It proved wrong, but the issue is bigger than that. That’s just not how central banks work, and the Governor had to know that.
Central Banks Exist To Control Inflation, Not Provide Cheap Credit
To understand how reckless this was, you need to know the primary role of the BoC: control inflation. It’s a single-mandate central bank with the job of keeping inflation at the target. The target rate is currently 2%, with a tolerance of 1 point. Anything between 1% and 3% are considered acceptable for inflation.
They manage inflation primarily by using interest rates to influence money supply growth. When that fails, they use tools like quantitative ease (QE) to drive more inflation. Similarly, if they need less inflation they use the opposite— quantitative tightening (QT). When inflation was ripping way past the target, it’s worth nothing they were still using QE. Currently the BoC is using QT, but they aren’t hitting the break as hard as they were hitting the gas.
Still have doubts? It’s the first thing on the BoC website: “We are Canada’s central bank. We work to preserve the value of money by keeping inflation low and stable.”
Central Banks Should Be Data Dependent, and Respond—Not Control
Central banks are responding to conditions, and should therefore be data dependent. It also takes 18 to 24 months for the market to fully reflect changes in monetary policy. In October 2020, when Governor Macklem said this, he was less than a year into the impact of rate cuts.
They would have known at least a year more was needed to assess the impact. On top of that, they said it was a period of uncertainty, but they were certain how they’d act. That’s a huge problem.
A data-dependent organization shouldn’t assure people of where things will be. It clouds their judgment, and brings up issues with the transitory inflation narrative. Commercial banks called out the dismissal of inflation a year before the rate hikes. Was the BoC the only one that didn’t see this, or were they trying not to see it?
It’s important to recognize that a forecast isn’t a promise. However, what the BoC did was more than just a forecast, and it wasn’t unqualified advice either. Governor Macklem assured households that rates would be low, to drive credit growth. Households and businesses are now facing a policy rate 15x higher than they were told to expect. At least he found some inflation, right?