- In the fight against inflation, the Bank of Canada must keep one eye on Ottawa and one on Washington.
- “There are three issues,” Brian Mulroney, the future Prime Minister of Canada, told a raucous crowd in Nova Scotia 38 years ago.
After a decade of combating inflation and the high-interest rates that entailed, Mulroney and his Progressive Conservative Party won a landslide victory against the Liberals in the election the following year.
Nearly four decades later, the Bank of Canada or, most likely, Finance Minister Chrystia Freeland, in her budget update next week seem to agree that jobs and the economy are more important to Canadians than inflation fears.
“It’s largely a good information story for many Canadians many Canadians are getting jobs,” said Bank of Canada deputy governor Toni Gravelle, speaking to the Surrey Board of Trade in British Columbia on Thursday.
“And the fact that they have jobs and incomes means that there is more demand for all the goods also all the businesses out there.” Gravelle’s remarks came in the context of the federal government’s impending decision to renew the central bank’s authority to keep inflation within a target range by raising or lowering interest rates.
And the more extended inflation is allowed to run hot, the more likely wage earners and businesses will expect inflation to continue, pushing wages and prices even higher something Gravelle has stated he wants to avoid.
If that does not happen, Gravelle stated that the bank would use its tools, i.e., interest rate hikes, to bring inflation back down to its two-percentage-point target range.
However, regardless of whether Ottawa changes the central bank’s mandate, Gravelle and his governing council face another constraint: inflation is a global phenomenon.
Despite its repeated assertions that it operates independently, the Bank of Canada cannot address a global issue alone. Raising rates significantly before the Federal Reserve of the United States does the same would distort the price of the loonie even thus trade without resolving the problem.
Source: CBC News
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