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Hot inflation opens a rare attack on the Bank of Canada


The Bank of Canada misjudged inflation, soaring prices and the Canadian economy began to overheat.

Central Bank, one of the world's leading central banks, is more aggressive than initially expected, just as Canada's household debt levels are well above other G7 countries and have reached new highs. It has been forced to catch up by raising interest rates.

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.

But still, politician Pierre Poirier, a front runner who leads the opposition Conservative Party, who regularly uses social media to accuse the central bank of being incompetent and a government puppet. Faced with almost daily attacks by Vul.

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

"There is always room for transparency, which is probably what we are reflecting on 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% target. increase.

Prices are currently rising at levels not seen since 1983, reaching 7.7% in May and above 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 can we maintain credibility? The most important thing we do is bring inflation back to our goal and we are committed to achieving it." Rogers said.

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

'A fairly serious communication mistake'

Banks stick to forward guidance in July 2020 The interest rate was expected to take several years, stating that "the slack in the economy will be absorbed."

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

{38 Mr Rogers said she had to stick to forward guidance. She said, "I know it will work next time."

However, according to an interview with an economist and a former central banker, doing so tied up the bank's hands and caused parts of the economy to react more slowly than usual due to overheating. rice field.

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

David Dodge, 2001-2008 Governor of the Bank of Canada, said Canadians are not overly worried about inflation by central banks and therefore "keep interest rates at zero forever." And it will be hell or high water. "

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. ..

"We have corrected a lot. We made some mistakes. We were transparent about it," Rogers said. "Our work relies on predictive power, and prediction has been a huge challenge for everyone in this environment."

Still exciting

Trudeau and the Minister of Finance Chrystia Freeland defended the independence of the central bank and attributed soaring prices to global supply chain predicament and an unexpected war in Europe.

"No one understands everything right," said a senior government official. "But what didn't work for (Bank of Canada) was that (Vladimir) Putin was trying to invade Ukraine."

Economists say the war in Ukraine complicates the situation. Agrees that the inflation has risen sharply, but was already sustained 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.

Freeland's office defended that choice, saying that this year's budget is "on the path to rapid fiscal tightening, especially by peer standards."

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.

And higher rates don't seem to help slow down runaway prices, said Ottawa resident David Struba, whether the Bank of Canada trusted to return inflation to its target. He added that he was not sure.

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

One way to regain public confidence is to publish the minutes of a central bank meeting, said Scotiabank's vice president of capital market economics. Said Derek Holt.

"The Bank of Canada says it's consensus-driven, so if that's really true, they reveal how this consensus was achieved. Should be perfectly fine, "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