Article content

By John Turley-Ewart

On Wednesday, the governor of the Bank of Canada, Tiff Macklem, is widely expected to reduce the central bank’s policy interest rate for the third consecutive time. For the two-million-plus Canadians renewing mortgages this fall and next year — and those tapping credit lines to keep up with the rising cost of living — a rate cut offers some relief, but not enough.

Article content

Even if the Bank of Canada proves aggressive and cuts its key rate by 50 basis points on Sept. 4, from 4.5 per cent to four per cent, it will only dull the pain but not cure the hardship facing many.

In Economics 101, students learn changes to monetary policy (increases or decreases in central bank rates) take a year or two before fully working their way through the real economy — that is, to the day-to-day lives of individuals, measured by their ability to afford necessities, find and hold onto employment and secure adequate wages that support the standard of living to which they aspire.

Canadians are experiencing that Economics 101 lesson in real time.

Outstanding credit card balances are the highest on record, averaging $4,300. Non-mortgage delinquencies are on the rise, surpassing levels from the early days of the pandemic in 2020. Provisions for credit losses at Canadian banks are mounting.

Despite recent easing of the Bank of Canada’s policy rate, it remains, according to National Bank, “one of the most restrictive in a generation.”

The Bank of Canada’s rapid interest rate increases started in March 2022 and ended in July 2023. Rates went from .25 per cent to five per cent and stayed there until this June. Inflation fell from its peak of 8.1 per cent in June 2022 to 2.7 per cent as of this May.

Article content

Article content

Now we are paying the price.

The troubling outcome of the Bank of Canada’s policies is unemployment. It has been rising since April 2023. Nearly 1.5 million Canadians are now out of work. Canada’s unemployment rate is 6.4 per cent as of June. Youth unemployment (15 to 24 year olds) is 14.2 per cent, which explains why people under 35 increasingly miss their credit card payments. It will get worse before it gets better.

The C.D. Howe Institute recently noted the “gap between the number of unemployed and job vacancies … is widening … making it increasingly difficult for unemployed individuals to secure jobs.”

As the price mounts, it’s worth asking: Did it need to be so high?

The Bank of Canada’s mandate sounds pragmatic enough:  “Flexible inflation targeting.” Yet the nomenclature belies the fact that our central bank is governed by an inflation-centric mandate that trumps unemployment and pegs the natural unemployment rate at about six per cent, with rates below that deemed to cause inflationary pressures by driving up wages. The original vision for Canada’s central bank was broader.

Article content

When the Bank of Canada Act passed in 1934 the bank’s purpose was “to mitigate by its influence fluctuations in the general level of production, trade, prices and employment.” It largely stayed that way till 1991 when successive federal governments agreed to limit the central bank’s scope to managing price stability following high inflation witnessed in the 1980s.

This stands in stark contrast to the U.S. Federal Reserve’s dual mandate, which targets an inflation rate of two per cent and maximum sustainable employment. The Fed’s Open Market Committee believes the natural rate of unemployment in the U.S. is 4.4 per cent, much lower than Canada’s, which may explain why wage growth and productivity here are anemic compared to the U.S.

The Fed’s dual approach was on full display recently when Federal Reserve Chairman Jerome Powell spoke at the Jackson Hole meeting of central bankers last week. Noting that unemployment had reached 4.3 per cent in the U.S., and wage gains were moderating, Powell signalled rate cuts were on the way and declared that the U.S. central bank “will do everything we can to support a strong labour market as we make further progress toward price stability.”

Article content

Such language is foreign to the Bank of Canada despite official unemployment in Canada being 49 per cent higher than in the U.S. It prefers to talk about economic theory, Beveridge curves and laboratory tests. Scanning the last three summaries from the Bank of Canada governing council on interest rate decisions reveals two mentions of unemployment. A similar scan of the minutes from the Federal Reserve about rate decisions reveals 30 mentions of unemployment.

In 2026 the current inflation-centric mandate of the Bank of Canada will expire. Whether it should continue after that is a question that will be asked frequently over the coming year.

John Turley-Ewart is a regulatory compliance consultant and Canadian banking historian.

Article content