Failure to Share Benefits of Growth Is Fuelling Populism, Says Bank of Canada Governor

Bank of Canada Governor Tiff Macklem gestures during a press conference at the Bank of Canada in Ottawa, on Oct. 26, 2022. The Canadian Press/Sean Kilpatrick

Bank of Canada Governor Tiff Macklem said on Dec. 13 that the period of low inflation in recent years is the product of solid growth through globalized and free trade, but the lack of sharing these benefits has created a backlash and these “forces are shifting.”

“The failure to adequately share the benefits of growth have fuelled populism that is causing countries to turn inward,” Macklem said during his year-end address hosted by the Business Council of British Columbia.

“Support for globalization is stalling or even reversing and productivity growth is trending down.”

Macklem said that these factors and others affecting global trade, such as Russia’s invasion of Ukraine and the pandemic, are leading to a rearrangement of supply chains to make them more resilient, “but at the cost of efficiency.”

This leads the governor to assess that there won’t be the same disinflationary forces of the past three decades, which he linked to his mandate to bring the inflation back under control.

“These potential developments could make it harder to bring inflation back to 2 percent and keep it there. But how much harder is difficult to say,” he said.

Inflation, as measured by the Consumer Price Index (CPI), peaked in June at 8.1 percent and the latest readings of September and October were at 6.9 percent.

The Bank of Canada (BoC) started raising interest rates aggressively in March, bringing them from 0.25 percent to now 4.25 percent.

Macklem said future hikes will be dependent on incoming data and the BoC’s judgement on the outlook for inflation.

Cause of Inflation

Macklem did not take any direct responsibility for the rising inflation in his address, which he blamed on supply chain issues caused by the pandemic, Russia’s invasion of Ukraine, and higher consumer demand when the economy re-opened after the first Omicron wave.

“With hindsight, the monetary and fiscal policy tools that were used to stabilize the economy worked effectively to support demand, but we underestimated supply challenges,” he said.

The BoC’s monetary policy during the pandemic led to a sharp increase of the money supply, hence fuelling demand.

The federal government’s pandemic subsidies have also contributed to inflation, according to a recent Scotiabank analysis.

It says that a large part of inflation has been caused by global factors, such as U.S. inflation and supply chain challenges, but the federal subsidies were “likely exaggerated.”

Scotiabank says that this accounts for up to 1.25 percent of the BoC tightening needed to reign in inflation.

“In other words, the Bank of Canada’s policy rate would not need to be above neutral were it not for these programs,” wrote Scotiabank’s chief economist Jean-François Perrault in the Dec. 5 note.

Outlook

Macklem said the BoC’s New Year’s resolution is to restore price stability and he said the higher interest rates are working.

“Domestic demand is slowing and we expect GDP growth will be close to zero through to the middle of next year,” he said, qualifying that the adjustment “will not be easy.”

However this is necessary, he said, for the longer inflation remains elevated, the harder it is for Canadians to plan their spending and savings.

“Inflation erodes the value of money, it distorts and confuses the information and incentives that consumers, businesses, entrepreneurs, savers, and investors rely on to make their economic decisions. It feeds frustration, social tensions, and a sense of unfairness.”

Macklem said that despite the “shifting” of “global forces,” the future looks brighter than the past three years, although he warned about more supply shocks from “aging demographics, rising political tensions, and climate change.”