Facing up to a 'polycrisis' that the Bank of Canada may not have the tools to fix
The world is dealing with multiple problems that higher rates alone can't solve
The word "polycrisis" has been used before to describe an intersection of troubling economic and political events, but Jacqueline Best suggests we are living through an episode that may really warrant the designation.
As the Bank of Canada struggled this week to quell anger at soaring prices with a half-point jump in interest rates, Best — a political historian who has specialized in periods of monetary crisis — worries rate hikes won't be enough to solve such an interlocking mix of problems.
After Canada's central bank announced it was raising its overnight lending rate to 1.5 per cent, Deputy Governor Paul Beaudry, in a speech Thursday to the Gatineau Chamber of Commerce, implied the bank could double those rates to defeat rising inflation.
"We are taking these large steps because inflation has been persistently high, the economy is overheating and the risk that elevated inflation will become entrenched has increased," Beaudry said. "The governing council is steadfast in its commitment to return inflation to the two per cent target and is prepared to act more forcefully if needed."
Questioned by reporters at a news conference, Beaudry said "forcefulness" could imply future rate hikes of three-quarters of a per cent at a single session or a higher peak central bank rate of interest near three per cent.
It is clear the Bank of Canada foresees a challenging task ahead and wants to scare borrowers with the idea it will keep raising rates. As "everything inflation" (core inflation) bulges beyond the one to three per cent range the bank has promised to maintain, and as the domestic economy continues to surge, higher interest rates could cause problems of their own.
Best says the current crisis, caused partly by "a series of exogenous shocks," seems to be of a different character than those of the past.
"Some people call it a polycrisis," said Best on the phone this week. "It's like so many crises together: pandemic, war, inflation, you know, the energy impact."
But as we talked the list grew longer, some effects from outside the country — and some that will emerge from central bank rate hikes themselves. She points to political attacks on central banks' credibility, not just in Canada, as they stand accused of letting inflation get out of control.
Costs will be high
"It's a very difficult place right now and they can't lose their credibility," said Best. "So they are going to do what it takes, but I think the costs are going to be high."
Conservative leadership candidate Pierre Poilievre's recent calls for Bank of Canada governor Tiff Macklem to be fired hint at that building pressure. And Beaudry acknowledged Thursday that it was reasonable for Canadians to be "frustrated" with the bank over failing to hold inflation to its two per cent target.
But Best said she fears there is a danger that political outrage over rising prices could be replaced with new outrage over rising interest rates, especially in the housing market. Like many other observers, she believes global economies may be forced into recession.
And though the prospect is less likely, she warned of a possible financial crisis.
Commercial banks look better than they did in the 2008 crisis, Best said, but there remains a lot of uncertainty about how new financial technology will respond to higher interest rates as investors begin to look for less risky places to put their money.
"In the Canadian context, I worry about a major downturn in the housing market and how that could have knock-on effects," she said.
She noted that many residential property owners are investors who may treat those properties more like stocks if prices begin to fall, which would exacerbate a decline.
"Investors are faster to sell ... if they are in a difficult situation."
Just this week, U.S. banker Jamie Dimon, head of JPMorgan Chase, warned of an "economic hurricane" as the U.S. central bank continued to raise rates. And Canadian writer Stephen Marche, one of a number of authors warning of political unrest in the U.S., called economic instability one of the "threat multipliers" leading to political instability.
Paul Ashworth, Toronto-based chief North America economist for Capital Economics said that while house prices and stocks could be early victims of rising rates, business and residential investment and, normally, durable goods would be the next to take a hit. But with some people still sitting on savings and unfulfilled demand, especially for motor vehicles, that may take longer to kick in.
"Most manufacturers, because of supply shortages, have backlogs and waiting lists of anything up to 12 months, so people have already paid their deposits," Ashworth said.
Beaudry made it very clear that interest rates set by the Bank of Canada will not solve imported inflation from broken supply lines or commodities prices lifted by war, but — like strong central bank pronouncements of the past — the point may have been to send a message to Canadians that this time the bank is really serious.
"The bottom line is we will get inflation back to two per cent and we'll do what's necessary to get there," Beaudry said.
Whether such stern words will work this time is an open question. And no matter how determined central bankers are to stay out of politics, Best said that when faced with anger from voters, politicians know that periods of rising interest rates can be politically fraught.
"High rates tend to produce more conflict than very low rates," she said, noting that rising interest rates have led to government defeats and opposition victories.
"Managing inflation has always been partly about fiscal policy, partly about monetary policy and partly about whatever else people can come up with," she said. "It's very political."