By putting the economy at risk to fight inflation, the Bank of Canada is making the usual mistake

By targeting inflation, the Bank of Canada is making a classic mistake. This risks sending the economy into recession.

Bank of Canada Governor Tiff Macklem is aware of the danger. He’s not stupid. But in a misguided effort to reduce inflation, he raises interest rates anyway.

Macklem argues that it is better to act now than to wait for inflation to dominate the economy. He fears that unless the central bank acts quickly to fight inflation, Canada could be caught in a wage-price spiral.

In fact, he says it’s better to feel pain now if it can save Canadians more pain later.

This is the argument that the central bank always advances.

Canadians will certainly feel pain now. By raising its benchmark interest rate by one percentage point, the Bank of Canada is signaling that it wants lenders to raise the interest rates they charge on everything from mortgages to short-term bank loans. .

The hope here is that it will put enough people out of work to drive down wage rates. In other words, the central bank focuses on wages in its efforts to control the wage-price spiral.

It’s weird that it works. When people are asked about inflation, they usually focus on prices rather than wages. Prices at the gas pump, for example, are rarely blamed on the exorbitant salaries paid to self-serve attendants.

However, the wages paid to gas jockeys are indirectly within the jurisdiction of the Bank of Canada – in the sense that the actions of the banks can affect them.

In short, the central bank focuses on interest rates because it can. It might not help. Indeed, it can cause damage. But it has an effect – which is important for a beleaguered Macklem.

The history of the central bank is well known. He took this route in the 1980s and again in the 1990s. In both cases, the central bank used interest rates to encourage recession and job loss in order to extract inflation from the system.

It worked, but it was brutal.

There’s no reason to believe that Macklem’s solution won’t be so brutal. There is not much you can do to fight inflation. At best, we could do as little as possible. This would at least limit the damage of a self-inflicted recession, but it would do little to counter inflation.

The alternative is to take inflation on full blast. That would be welcomed by those who say the Bank of Canada has been too accommodating on rising prices.

He would appeal to those who call for tough love.

This would likely enhance Macklem’s stature among the small group of Ottawa insiders who dominate Canadian economic policy.

“Don’t mess with Tiff” might be the new watchword.

I bet Macklem will go all out. To be fair to him, he doesn’t have many other choices. We are used to casually using high interest rates to fight inflation. I hope this will continue. We are doomed to relive our mistakes.

Martin E. Berry