Terence Corcoran: Bank of Canada is back on track

Skip to Content News Archives Economy Defence Energy Oil & Gas Renewables Electric Vehicles Mining Commodities Agriculture Real Estate Mortgages Mortgage Rates Finance Banking Insurance Fintech Cryptocurrency Defence Work Wealth Smart Money Wealth Management Investor Personal Finance Family Finance Retirement Taxes High Net Worth FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials More Innovation Information Technology FP500 Podcasts Small Business Lives Told Tails Told Shopping Financial Post Store Obituaries Place a Notice Advertising Advertising With Us Advertising Solutions Postmedia Ad Manager Sponsorship Requests Classifieds Place a Classifieds ad Working Profile Settings My Subscriptions My Offers Newsletters Customer Service FAQ News Economy Energy Mining Real Estate Finance Defence Work Wealth Investor FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials This advertisement has not loaded yet, but your article continues below.HomeFP CommentTerence Corcoran: Bank of Canada is back on trackPrices under control via the only policy that works: monetary policyLast updated 16 minutes ago By most indicators, the Bank of Canada is firmly back in a post-pandemic inflation control mode. Photo by HYUNGCHEOL PARK/PostmediaFor several years the leading issue on the minds of Canadians has been the rising cost of living, with food and housing emerging as the priorities on the list of boxes ticked by voters polled before and during elections. Politicians and activists have scrambled to blame corporate price-gouging and other factors for driving up prices across the economy.THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLYSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.SUBSCRIBE TO UNLOCK MORE ARTICLESSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.REGISTER / SIGN IN TO UNLOCK MORE ARTICLESCreate an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.THIS ARTICLE IS FREE TO READ REGISTER TO UNLOCK.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountIn British Columbia, former premier David Eby and his Conservative successor, Lorne Doerkson, both promised to tackle the affordability crisis. Cost of living was a leading topic during the Toronto mayoral race, with national politicians such as Conservative Leader Pierre Poilievre joining the fray. Nationally, a new October Abacus poll put cost of living as the leading issue for 65 per cent of Canadians.This advertisement has not loaded yet, but your article continues below.It may take a while — a year or two, or more? — before cost of living falls down the list of concerns of Canadian voters, but the foundation for more stable long-term inflation has been laid by the Bank of Canada, promising a future trend that will hold overall inflation rates within the existing 1.0- to 3.0-per-cent targets.Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againThe decision Wednesday by the bank’s board of governors to slightly raise its overnight interest rate by a quarter point from 2.25 per cent to 2.5 was a mild but clear indication that the bank is committed to maintaining low inflation over the long term. “The best thing we can do,” said bank Governor Tiff Macklem, “is that we can get inflation down. We can prevent higher energy prices from spreading to the prices of other goods and services.”Economists have differing views over whether the quarter point increase was really necessary. “We believe the bank should have waited,” said the C.D. Howe Institute’s leading monetary economists. Whether the bank’s rate hike is technically sound, and whether it serves the precise objectives laid out by Macklem is a separate matter from the Bank of Canada’s larger policy objective: a steady and so-far successful focus on inflation control.This advertisement has not loaded yet, but your article continues below.A slight 0.25 per cent increase in the bank’s overnight does not alone shift monetary policy enough to redirect the whole economy. But it is another indication that the bank is maintaining the steady focus on inflation control launched in the wake of the COVID-19 pandemic inflation disaster.It’s a focus that has succeeded in lowering the Consumer Price Index (CPI) to 3.1 per cent from its post-pandemic high of 8.1 per cent. More importantly, a key measure of core inflation that excludes volatile short-term changes is now back to 2.5 per cent from its 6.1 per cent post-pandemic peak. The bank has effectively brought inflation back down into ranges that existed prior to the pandemic (see graph).Also back to normal range is money supply. When the pandemic hit, the bank employed two key inflation-causing policies in an attempt to reduce the impact of the pandemic’s economic restrictions. The first move was a sharp cut in the overnight interest rate down to 0.5 per cent. The second was a massive purchase by the Bank of Canada of $440 billion in securities. At the same time, major chartered bank lending injected another $450 billion into the economy.This advertisement has not loaded yet.This advertisement has not loaded yet, but your article continues below.The result was a massive surge in the money supply, long considered by monetary policy theorists, known as monetarists, to be the primary source of inflation. “Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output,” said Nobel economist Milton Friedman back in 1963. Friedman’s monetarism dominated central banking during the 1970s and 1980s, then faded, but the link between money supply and inflation has been making a bit of a comeback.As the graph suggests, the massive increase in money supply, known as monetary aggregates, rocked the economy. After the bank slashed its overnight rate to 0.5 per cent in February 2020, one of the Bank of Canada’s monetary aggregates, M2++, immediately began a rapid growth path that peaked in 2022 at an annual rate of more than 14 per cent.The Consumer Price Index soared to a peak of 8.1 per cent and one of the Bank of Canada’s core inflation targets peaked at 5.4 per cent. The money supply and inflation rates began to fall only after the bank began raising interest rates in 2022.This advertisement has not loaded yet, but your article continues below.Since then the bank has maintained interest rate policies that have prevented expansion of the money supply. The inflation damage had been done, however. The inflation sparked by low interest rates and expanded money supply is now baked irreversibly into the economy and will forever remain part of the Canadian cost of living measure.No amount of federal, provincial or municipal intervention in the name of reducing the cost of living and increasing “affordability” can reduce the monetary inflation now embedded in price levels. Politicians may sell voters the idea that higher food prices are the product of monopolistic grocery industry practices that need to be controlled, but the political posturing is based on economic ignorance.The central focus now must be on the future of inflation and the essential need to keep it under control within the 1.0 to 3.0 per cent range established prior to the pandemic. As the graph illustrates, one of the core inflation measures is now right on target while the key measure of money supply is back down to pre-pandemic growth rates.This advertisement has not loaded yet, but your article continues below.One conclusion seems clear — monetarism and a focus on money supply appears to be making something of a comeback. Kevin Warsh, chair of the U.S. Federal Reserve, has clearly indicated he wants to refocus the Fed on money supply as a guide to inflation control. There are no signs that the Bank of Canada is shifting gears on monetarism, although its mandate and policies are coming up for review in December. Will former Bank of Canada governor Mark Carney have a say?The idea that monetarism is returning to central bank thinking has been frequently discussed recently — often as a question rather than a fact. Economist Tim Congdon recently asked, “Is monetarism making a comeback?” A Financial Times columnist recently asked, “Should monetarism make a comeback?”Back in 2023, TD Economics issued a paper arguing that “including money supply in a statistical model for inflation can improve its performance,” a conclusion TD economists said was supported by the pandemic experience.Earlier this year, Michael Bordo, Rutgers University’s emeritus professor and former head of the Center for Monetary and Financial History — in a paper published by the Federal Reserve Bank of St. Louis — argued that the principles behind Milton Friedman’s 1963 monetarism are relevant today. “Indeed, the fact that every measure of monetary aggregate ballooned in 2020 to 2021 was a clear red flag of an impending inflation surge, yet the Fed and other central banks prioritized other signals.”By most indicators, the Bank of Canada is firmly back in a post-pandemic inflation control mode.This advertisement has not loaded yet.Notice for the Postmedia NetworkThis website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. 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