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Banks of Canada face political heat amid rising inflation

Bank of Canadamisjudged inflation and sticks to strict forward guidance that could not respond quickly when prices soared and the Canadian economy began. After that, he received a rare attack from critics. Overheat.

Now one of the world's leading central banks, Canada's household debt level has skyrocketed far above the others, raising interest rates more aggressively than initially expected and catching up. I have been forced to do so. G7 countries.

Banks are faced with questions from politicians, economists, and even the general public about the uncertainty of the decision-making process, as the recession may be imminent. We are calling for publication. This is a common practice among many people. That companion.

As part of this, the Bank of Canada has acknowledged the failure and promises greater transparency, including an analysis of inflation forecast errors scheduled for July.

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But still, a politician who is a front runner leading the opposition Conservatives who regularly participate in social media. Faced with almost daily attacks by Pierre Poilievre. He accuses the central bank of being incompetent and a government puppet.

Read more: Canada's inflation rate in May reached 7.7%, supported by soaring gas prices and food prices.

He also promised to dismiss Governor Tiff McClem if he was elected. This is a move that requires changes to the law, but still emphasizes the level of dissatisfaction.

"Is there always room for transparency? Perhaps that's what we're reflecting on right now," Senior Vice Governor Carolyn Rogers told Reuters in an interview this month. "That's what we think about."

The Bank of Canada, which is independent in policy setting, has the liberal opposition leader Jean Chrétien at a high interest rate against Governor John Crow. I haven't faced this level of political enthusiasm since the early 1990s. policy.

Poirievre, who is not yet the leader of the opposition, is unlikely to become prime minister before 2025, when the next election is scheduled. But his attack occurs when the central bank's public confidence in controlling inflation is essential to the economy.

The Bank of Canada, like many other central banks, has inflation "temporary" or "temporary" until the fall of 2021, and inflation has already doubled its 2 percent target. increase.

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Prices are currently rising to 7.7% in May, a level not seen since 1983. It has reached and exceeded the target for 15 months. As the prices of daily necessities soar, the risk of inflation becoming established is increasing.

According to a Canadian Conference Committee survey released this week, three-quarters of Canadians expect inflation to remain above target in three years. Bank of Canada's own data also show less confidence in its ability to keep inflation low and stable.

"How do you maintain credibility? The most important thing we do is get inflation back to our goal and we are completely focused on doing it. "Rogers said.

"It won't happen overnight," she added. "But we are paving the way and working."

'A fairly serious communication mistake'

2020 There was a slow start as banks stuck to forward guidance in July of the year and were promising. Keep interest rates at a solid level until the economic downturn, which was expected to take years, is absorbed.

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"Have a mortgage If you are, or are considering a large purchase ... you can be confident that interest rates will be lower in the long run, "Macklem said in July 2020.

Rogers said he had to stick to forward guidance. This is how we know it will work next time.

However, according to interviews with economists and former central bankers, doing so tied up banks and made them react slower than usual due to overheating of parts of the economy. I did.

Macklem also suggested that he wanted a full labor market recovery before raising interest rates.

Read more: Freeland defends budget after Scotiabank accuses the federal government of "doing nothing" about inflation

If a Canadian-led central bank is not overly concerned about inflation and therefore maintains interest rates "forever essentially zero, hell or high water" Believe.

It was a "quite serious communication mistake," Dodge told Reuters.

Dodge and other Reuters revealed that it was right for the central bank to respond vigorously at the start of the pandemic, saying the unprecedented nature of the crisis made it difficult to predict outcomes. ..

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"We understood a lot correctly. We made some mistakes. We were transparent about it, "Rogers said. "Our work depends on predictive ability, and prediction was a huge challenge for everyone in this environment."

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Trudeau and Finance Minister Chrystia Freeland defended the independence of the central bank, a war in Europe that attributed soaring prices to global supply chain predicament and unforeseen circumstances.

"Not everyone understands everything correctly," a senior government official said. "But what was wrong with (Bank of Canada) was that (Vladimir) Putin was trying to invade Ukraine."

Economists said the war in Ukraine complicated the situation. He agreed that inflation had risen sharply, but had already persisted before the invasion. Complicating the situation is that the central bank is currently raising interest rates, despite the federal government's continued development of stimulus.

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Freeland's office defends that choice, and this year's budget is "on the road to rapid fiscal tightening-" "Especially according to peer standards," said a ministry spokesman.

With the market betting on a rise of 75 basis points in July, economists are at risk of aggressive tightening that undermines the credibility of banks with the pledged cheap money, but now He states that he is facing a surge in debt repayment costs.

Canada's former red-hot housing market has already shown a crack due to high interest rates as sales plummeted and prices fell below their February peaks.

How rising benchmark interest rates affect mortgage and credit line rates

And higher interest rates runaway Ottawa resident David Struba added that he wasn't confident that he trusted the Bank of Canada to bring inflation back to its target.

"If they're just raising interest rates and it's their main dominance, I don't know how effective it will be," he shrugs. rice field. "Inflation is still rising."

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One way to regain public confidence is in the central bank To publish the minutes of the meeting, said Derek Holt, vice president of capital markets and economics at Scotiabank.

Read more: Rampant inflation means banks in Canada must raise interest rates above 3%: economists

"Bank Canada Bank states that it is consensus-driven, so if that is really true, we will disclose how this consensus was achieved. There should be no problem at all, "he said.

The Bank of Canada states that the fact that consensus decisions are made does not require formal minutes, and the quarterly monetary policy report "provides transparency to deliberations." increase.

Rogers said banks are doing their best to "present different perspectives" in their speeches and statements.

But so far, it has rarely subdued critics. Populist and Bitcoin enthusiast Poilievre continues to drive the story across social media with tweets and Facebook posts that win thousands of likes from 500,000 followers.

"They did what Trudeau told them: printing money for the deficit and causing runaway inflation&dangerous housing bubble," he wrote in a tweet earlier this month. rice field.

(Report by Julie Gordon and Steve Scheller in Ottawa, edited by Denny Thomas and Deepa Babington)

© 2022 Reuters