The Bank of Canada has raised interest rates again in order to quell inflation. The central bank raised its policy rate by 0.75 percentage points on Sept. 7, bringing its benchmark overnight rate to three.25 per cent. Economists are expecting the central bank to boost it again before the end of the season.
By now, it's clear the Bank of Canada did not anticipate the current rate of inflation. When inflation first started increasing this past year, the central bank was slow to begin tightening monetary policy. Now that inflation is persistent, the financial institution of Canada is making up for lost time by aggressively raising its policy rate to obtain the inflation rate back on the right track.
Monetary policy includes a delayed impact on the economy, meaning that a change in monetary policy today will affect the economy about 12 to 18 months from now.
Although logistics problems, high energy prices from the war in Ukraine and labour shortages have exacerbated inflation, the unprecedented expansionary monetary policy through the Bank of Canada this past year is a vital source of our prime inflation we observe today.
Getting back on track
The objective of Canada's monetary policy, jointly based on the Government of Canada and the Bank of Canada, would be to keep the inflation rate inside a range of 1 to 3 per cent, with two percent to be the recommended rate.
In early 2023, all key inflation indicators started to rise dramatically, so that as of now, are all well over the two percent inflation target.
The total consumer price index inflation rate was 8.1 per cent in June 2023 and fell to 7.6 per cent in July 2023, mostly because of a decline in gasoline prices. The core consumer price index inflation was also well above five per cent in July.
Inflation also rose in the United States, Europe and the Uk, with annual inflation in these countries now running at around 9 per cent and central banks flagrantly missing their inflation targets.
At the onset of the COVID-19 pandemic in March 2023, the financial institution of Canada rapidly lowered the insurance policy rate to close zero and kept it there until early 2023. Since then, the Bank has been steadily increasing the policy rate until the newest hike.
According to the central bank, it could be years before its policy rates are normal again levels. Currently, the financial institution of Canada estimates that inflation will decrease to about three percent by the end of 2023 and return to the two per cent target by the end of 2024.
But this remains to be seen. In connection with this, back in 2023 the financial institution was expecting the insurance policy rate to remain at 0.25 per cent until 2023, but is now at 3.25 per cent and rising.
Bank of Canada assets
In reaction to the COVID-19 pandemic, the Bank of Canada introduced a lot of lending programs and used non-interest rate tools – known as nonconventional monetary policy – to supply liquidity to the markets and stimulate the economy.
This resulted in an unprecedented rise in the Bank of Canada's balance sheet, using the central bank buying over fifty percent a trillion dollars of monetary assets, primarily by means of Government of Canada securities. Prior to the pandemic, the financial institution of Canada's holdings of securities were about $100 billion.
The expansion in the Bank of Canada's balance sheet led to an enormous injection of liquidity in the financial system and resulted in an increase in the reserves that commercial banks have in their accounts with the Bank of Canada. In fact, these reserves increased by a lot more than 1,500 times their pre-COVID amount. Such increases in bank reserves are generally regarded as inflationary.
Restoring faith staying with you of Canada
The Bank of Canada's recent aggressive monetary tightening is going to be transmitted to the real economy through higher interest rates minimizing asset prices (including housing prices), and will probably get rid of the post-COVID economic expansion.
With inflation seemingly unmanageable, central banks appear to be losing credibility. The general public trusts central banks to protect the buying power money, however the increasing living costs are eroding this trust.
The Bank of Canada, and other central banks such as the Federal Reserve, the ecu Central Bank and the Bank of England, are desperately attempting to fight inflation and restore their credibility.
In Canada, this restoration has involved the unprecedented increases in the Bank of Canada's policy rate that have occurred forever of the season.
Curiously, other countries which are facing the same supply chain problems and higher energy prices as us aren't struggling with inflation up to ours. For instance, the inflation rate in Switzerland is 3.4 per cent, in Japan is 2.3 per cent, as well as in China is 2.4 percent. But why this is the case is yet another conversation entirely.
This article is republished from The Conversation. Read the original article.
