The central bank’s commitment to high rates is an overdose of prudence, guided by the rigid dogma that threatens to smother vibrancy and innovation – the very growth it claims to safeguard, writes James Thorne from Wellington-Altus Private Wealth.Chris Wattie/Reuters
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As Canada braces for a tidal wave of mortgage renewals in the next couple of years, the Bank of Canada (BoC) stands at a critical juncture. Its stubborn adherence to high interest rates threatens to shackle the economy under crippling financial burdens, potentially stifling economic growth for years. Despite inflation already being within targets, maintaining interest rates “higher for longer” not only drives inflationary pressures, but also exacerbates the rental crisis.
The necessity for bold rate cuts is glaring, and mere 50-basis-point reductions are inadequate to normalize rates or correct the inverted yield curve. These half-measures suffocate the private sector. Ironically, the BoC’s own monetary policy – which is supposed to safeguard stability – is the saboteur, conspicuously ignored in its own reports. Rate hikes on their own can become inflationary, as they are now; persisting with them to control inflation is akin to dousing fire with gasoline.
The BoC appears to be more obsessed with countering Prime Minister Justin Trudeau’s fiscal policies than shielding the private sector from devastation. The government’s dismissal of deficit concerns faces a reality check. The younger generation realizes fiscal decisions carry consequences; we need to deal with extreme debt levels. Currently, with an inverted yield curve and two-year yields lagging the overnight rate, credit markets are screaming for significant cuts and normalization.
Given the alarming level of deficits, managing the debt bubble is critical amid long-term deflationary forces. Astonishingly, interest payments now surpass health-care costs in Canada.
Historical patterns remind us that when fiscal prudence is reinstated, the economic landscape shifts dramatically. Interest rate cuts emerge as a crucial tool in this era of fiscal dominance akin to the post-Second World War era, when growth and negative real rates were the solutions.
Canada’s economic health demands decisive, substantial action. The central bank stands at a crossroads: unlock tremendous potential or perpetuate an overly restrictive status quo. As the clamour for interest rate cuts intensifies amid manageable inflation, the BoC’s commitment to high rates is an overdose of prudence, guided by rigid dogma that threatens to smother vibrancy and innovation – the very growth it claims to safeguard.
At this critical juncture, the BoC must dare to stop following the path of the U.S. Federal Reserve Board blindly. Canada’s economic well-being hangs in the balance, awaiting a courageous paradigm shift regarding rates, currencies and inflation.
The belief that interest rate differentials solely dictate currency valuation is an oversimplification. Currency relationships are intricate dances, influenced by a complex array of factors and not merely the interest rates of neighbouring economies. Canada’s economy is more interest-rate sensitive than the U.S. economy; cutting rates will impact fundamentals positively, supporting the loonie’s valuation. With mortgage costs and rent driving inflation, decisive overnight rate cuts would be a potent weapon.
Former BoC Governor Mark Carney sounded a clarion call in a speech he delivered at an event in Toronto in late April in which he said the federal budget “wasn’t necessarily a budget about growth and resilience – and we need both”: prosperity cannot be redistributed if it doesn’t exist.
Allowing public debt to spiral while the public sector overshadows the private sector is a grave error, ignoring the necessity of a robust, risk-taking private ecosystem – especially amid global restructuring. Public sector growth has dwarfed the private since the pandemic, leading to concerning declines in per capita gross domestic product and productivity. Unchecked fiscal indulgence will stifle the very prosperity sought for wealth redistribution.
The path ahead demands an environment in which the private sector can thrive, innovate, and drive growth – not one in which it’s shackled with unsustainable public debt, an overreaching state, and a stagnant BoC clinging to the past. Mr. Carney’s plea demands a radical mindset shift: liberating prosperity-driving markets from burdens.
The way forward rejects austerity for strategic growth, savvy resource management, targeted investments and leveraging technology breakthroughs.
Interest rates must decline significantly, potentially below 2 per cent if history holds true. This house of sand cannot withstand the shifting economic winds. The BoC must heed the call for change, lest it shackles Canada’s potential in misguided rectitude. Bold action is required; prosperity hangs in the balance.
James Thorne is chief market strategist at Wellington-Altus Private Wealth Inc. in Toronto.
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