Governor of the Bank of Canada Tiff Macklem participates in a news conference on the bank's interest rate announcement, and the release of the quarterly Monetary Policy Report, in Ottawa, on July 24.Justin Tang/The Canadian Press
Diane Bellemare, PhD, is an independent senator and economist. Pierre Fortin is professor emeritus of economics at the Université du Québec à Montréal.
With the Canadian economy in poor shape, and amid a high risk of recession, it is clear to us that the Bank of Canada must immediately accelerate the return to lower interest rates in order to boost growth and employment.
After peaking at 8 per cent in mid-2022, Canada’s annual inflation rate has fallen back to an average of 2.75 per cent since the start of 2024. And if the effects of rising mortgage costs are removed, that lowers to 1.9 per cent, just below the 2 per cent target. While that positive trend is in part owing to the higher interest rates, the collateral damage has been significant: Since the Bank began raising the key rate two years ago, unemployment numbers have risen by 395,000 and reached a total of 1,399,000 last July, while Canada’s gross domestic product (GDP) per capita has fallen by 3.5 per cent.
So as well as quickly lowering the interest rate, we believe the federal government needs to rethink altogether how it fights inflation. The current strategy of relying solely on the Bank of Canada to adjust interest rates is too costly in both economic and social terms. We must pursue other strategies that target the root causes of inflation, which could include things such as putting into place competitive strategies, changes to labour market policies and budgetary and fiscal measures.
To do this, the government and the Bank of Canada together must co-ordinate fiscal and monetary policies, and the central bank should rely more on outside expertise in its decision-making.
In the aftermath of the pandemic, inflation arose primarily because of a combination of temporary and highly localized disruptions that affected supply chains and global commodity markets. In such situations, a policy based solely on high interest rates is akin to invasive chemotherapy that attacks everything in its path.
Insolvencies for small businesses, real estate developers and individual Canadians have all been on the rise. We could have done better.
To begin developing a new strategy, the federal government and the Bank of Canada must embark on an independent study of the monetary policy of recent years, one which precisely pinpoints the costs, benefits and short- and medium-term casualties of relying solely on such policy.
Some countries, including Sweden and New Zealand, regularly carry out an independent external study of their monetary policy. A recent report by the British House of Lords recommends this practice for the Bank of England. The same must be done in Canada.
This is important because another pandemic could strike. Supply chains and global commodity markets could be disrupted again. The climate crisis may cause food shortages. Political uncertainty may create instability. High interest rates did not overcome these causes of past inflationary surges and they would not overcome future ones either.
To continue with the cancer treatment analogy, today we no longer resort to aggressive general chemotherapy to fight against every cancer. We begin by identifying the precise cause of a tumour, and treat it locally. Several specialists are called in to devise a strategy that causes the least damage to the patient’s overall health. These same principles should be adopted to combat inflation.
To strengthen the country’s economic future, a one-size-fits-all anti-inflation policy such as across-the-board interest rate hikes, applied blindly regardless of cause or situation, is untenable. The role of the central bank is to promote prosperity by ensuring financial stability. That is why it is better to focus on co-ordinating monetary and fiscal policies that involve not only interest rates.
The initiative for such co-ordination must be political and involve major economic players and experts from the private and public sectors. The federal government could create an Economic and Social Council to bring these groups together. Its mandate would be to propose a co-ordinated strategy that promotes sustainable, non-inflationary prosperity. Like other central banks, the Bank of Canada could set up a Monetary Policy Committee, which would include external members who work in collaboration with this Economic and Social Council.
We are very much aware that implementing such an initiative would be complex. Yet we are convinced that it is high time to collectively address the shaping of a better strategy for controlling inflation, while maximizing growth and employment in both the short and long term in Canada.