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Expect more rate hikes from central banks despite a growing chorus of criticism


If you listen to a group of top economists representing business, labor and global finance, you might decide that central banks are crazy to keep raising interest rates.

But on Thursday, in response to that chorus of criticism, Bank of Canada Governor Tiff Macklem stressed that despite the “narrow path” to the kind of soft landing that could avoid a recession, interest rates must still be higher.

And while soaring global prices have helped keep inflation rolling, he says continued demand for Canadian workers is just one sign that soaring prices are now homegrown – and a Overheated economy needs to be cooled down by raising domestic interest rates more.

Need more interest rate

“We think further rate hikes are warranted to get inflation back on target,” Macklem told Canadian financial reporters on Thursday after speech before the Halifax Chamber of Commerce.

Not only that, as the Canadian dollar falls against other currencies around the world, Macklem said there could be more pressure to raise interest rates than if the loonie is holding its own against the US dollar.

Macklem wouldn’t speculate on exactly how much the raise would be.

But on Wednesday, BMO economist Sal Guatieri said the US Fed is likely to raise rates by 1.5 percentage points and the Bank of Canada will raise rates by three quarters of a percentage point “in the coming months.” next.”

As one reporter commented at Thursday’s press conference, such sharp rate hikes mean central banks around the world are being accused of making things worse.

Signs on shop windows in the village of St. Jacobs of Ontario is another indicator of Canada’s tight job market. Macklem said that low unemployment signals an overheated economy that needs to be cooled down. (Don Pittis / CBC)

Those accusations are not hard to find. From the United Nations, to market analysts, to those in the real estate industry and those worried about the welfare of Canadian workers, many see the current surge in interest rates explosively – in which Bank of Canada moved the fastest by far – as more of a problem than a solution.

LISTEN | Discuss where he hopes to boost the economy:

Cost of living13:18Tiff Macklem’s Challenging, Inflation-Fighting Year Isn’t So Great

As Governor of the Bank of Canada, Tiff Macklem has always worked to cool down inflation. He has raised interest rates at a faster rate than other G7 countries and there are signs that it may be starting to work. But can this tactic get us into a recession? Paul Haavardsrud asked Tiff Macklem if there was still a chance to steer the Good Economy for a gentle landing.

The point, of course, is that Canada is not acting alone. As Macklem said on Tuesday, the flexible exchange rate regime “gives us the ability to conduct an independent monetary policy geared toward Canada’s needs.”

But a report from the United Nations Conference on Trade and Development this week warned that the world’s richer countries must think of the implications beyond their own borders. Because thinking only of themselves, these countries run the risk of creating a possible global recession.”The damage is heavier than the financial crisis of 2008 and the COVID-19 shock in 2020“, the report suggests.

‘Gambling recklessly’

And yet many other critics expressed concern that jarring movements in financial markets could still trigger some sort of disruptive financial crisis, which would then affect vulnerable countries. hurt more in the world and hurt richer nations. Instead of a “black swan” – a past reference to unusual market events – one reviewer described the current market turmoil as “neon swan“signaling a market crash is about to happen.

This week, the International Monetary Fund (IMF) noted that, while banks are doing much better than they were before the 2008 financial crisis, some of the turmoil that existed in the banking sector now exists. can be found in other financial institutions. For example, the IMF warns that hedge funds holding increasingly difficult-to-disassemble assets may “amplify tension in asset markets. “

Upcoming black swan event? Black swan is shorthand for an unusual and bad market event. One critic warns of a ‘neon swan’ caused by the current market turmoil as central banks raise interest rates. (Anwar Mirza / Reuters)

As the Economist magazine warned this week, rising rates will likely be effective in breaking the back of inflation, but it could mean cracks could appear elsewhere. “It’s not hard to feel an omenmagazine said.

Other financial publications, including Fortune and CNBC, put their duels with “top economists” to describe why central banks “Not enough ability“or will create”Unbelievable calamities“if they continue hiking.

This week, there are new signs from Vancouver and Toronto that show the Canadian housing market on a road going downand I came across an ominous IMF quote in one of my columns from 10 years ago: “As house prices rise because households are burdened with debt … the next recession will be much deeper and longer than the bankruptcies that didn’t come before because of such accumulation of debt. .”

Bad for workers too?

It is clear that many holders of assets such as stocks and real estate find fault with central banks, but prominent labor economist Jim Stanford, director of the Vancouver-based Center for Future Work , wrote a detailed critique after testifying before a Canadian Senate committee on banking, commerce and the economy.

It is not inflation but a response to inflation that threatens another economic crisis, Stanford writes. come up with his own alternatives.

While it appears that the Bank of Canada is simply refusing to listen to alternative ideas, Macklem said he is happy to hear the analysis and criticism. But Macklem is constrained by his tools and his mandate from Congress, which is to bring inflation down to the bank’s two percent inflation rate.

And Macklem is not a weird man at all. Jerome Powell at the Federal Reserve is also on the same page, and despite all the economic criticism, there are many other top economists who support Macklem’s view.

Writing in the Wall Street Journal, Harvard economist Jason Furman, a former White House adviser, called the objections to more rate hikes “reasonable but inconclusive” and came to a very strong conclusion. similar to Macklem’s – that until inflation begins to approach its target range, central banks should not change course.

Obviously not everyone agrees with that strategy. But as Macklem said on Thursday, he believes the failure to bring inflation down quickly will create the kind of mentality we’ve seen in previous periods of inflation, where everyone decides prices and rises. salary at 5 or 7% is normal.

In that case, he said, “We’re going to have to target rates significantly higher. We’re going to need a more pronounced slowdown in the economy.”

If Macklem was right and it happened, the danger is that all of the concerns expressed by the critics listed above would still happen. They will come later, last longer, and get worse.

“Inflation is a burden on all Canadians,” said Macklem. “We are determined to reduce it to 2%.”

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