Fresh Takes

Fighting Inflation: The Bank of Canada Stays the Course

The Bank of Canada is continuing its fight against inflation.

The policy interest rate was increased by 0.5 percentage points this morning, from 3.25% to 3.75%.

It’s important to recognize the impact this will have on Canadian households, including through higher mortgage rates when these are recalculated.

It’s just as important to recognize, however, that the costs for the Canadian economy, and more specifically for Canadian households, would be far worse if the central bank allowed inflation to become entrenched. Price stability is much better than the surging prices we’ve experienced recently.

What households are living through right now, supply chain shocks aside, is the direct consequence of the quantitative easing measures of recent years. Like other goods, the value of money also fluctuates according to supply and demand.

The Bank of Canada’s decision to finance deficits not through financial markets but through the massive purchase of government bonds resulted in monetary expansion. Meanwhile, the quantity of goods that could be purchased with this money—and hence the demand for money—remained stable, or even diminished.

The current tightening of monetary policy, with interest rate hikes, seeks to rein in the speed of the expansion, in order to let the capacity of the market catch up to the prior expansion and return to a level of inflation between 1% and 3%.

Whatever some may think, “corporate greed” has not suddenly increased in 2022. Fiscal and monetary policy are to blame, and the solution requires the central bank to tighten monetary policy, as it is now doing.

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