Inflation was in the headlines practically all year and the rise in prices greatly contributed to poisoning the lives of consumers while forcing the monetary authorities to intervene systematically to curb its progression. If we finally see an exit from the tunnel for the next year, I had no idea last January that the surge in prices would cause so much damage and spark so much discussion in 2022.
On January 26, the Bank of Canada decided not to raise its key rate even though the inflation rate had just recorded an increase of 4.8% on an annual basis in December, an increase that was nevertheless well above the rate inflation target of 2% to 3% deemed acceptable by the central bank.
The Governor of the Bank of Canada had preferred to maintain its key rate at 0.25%, the lowest level to which he had lowered it since the start of the COVID-19 pandemic, with the avowed aim of accommodating the Canadian economy. . Tiff Macklem had, however, advised in the process that it was necessary to expect from March several increases in the key rate by the end of 2022.
The day after this non-intervention by the Bank of Canada, I wrote a column entitled “Panic” which, I admit, has aged a little badly since inflation has not ceased to wreak havoc and that interest rates have gone into a spin, with the key rate rising from 0.25% to 4.25%. My radar wasn’t totally confused though. Let me explain.
The sharp 4.8% rise in inflation in December 2021 was essentially the result of the hundreds of billions that the federal government had injected into the Canadian economy to keep it afloat, whether it was the Canada Emergency Response Benefit or the emergency wage subsidy, business support, recovery benefits…
This massive injection of capital has helped fuel consumer demand.
For the whole of 2021, consumer spending grew by 8.4% in Canada, compared to a contraction of 2.2% in 2020, at the height of the pandemic.
This overconsumption, which put pressure on prices, was itself fueled by the fact that consumers had tightened their belts quite a bit in 2020 and that they started spending unbridled in 2021, especially since they were still restricted in their travels abroad.
A deteriorating situation
Last January, there was no indication that inflation would become the subject of concern that it has become and which would force the massive and repeated intervention of the Bank of Canada as we have known it since March last.
Last January, economists predicted between three and five increases of 0.25 percentage points in the key rate during the year, which would bring it back to its level of 1.75% before the pandemic, they estimated.
This was without counting on the effects of the Russian invasion in Ukraine and the surge in energy prices that followed, as well as the rise in the price of many basic food products which became more scarce or whose supply has been severely disrupted.
In March, the Bank of Canada proceeded as planned with an initial increase of 25 basis points in its key rate, but the following month, it gave an additional turn of the screw with an increase of 50 points and another another 50 points in June.
With a rise in consumer prices of 8.1% in June, the Bank of Canada decided to take a much more aggressive approach by raising its key rate by 100 basis points in July, then by 75 points in September and finally by making two increases of 50 points in October and December.
The Bank of Canada’s key rate is currently set at 4.25%, while the prime rate of the major Canadian banks, the rate they grant to their best clients, is now at 6.45%.
For six months now, the panic effect has been very real among households who have to renegotiate their mortgage loan for still very high balances due to the sharp rise in real estate prices.
The good news, however, is that we see that inflation has started to moderate its progression and that this movement should continue in the coming months as economic activity slows and consumer enthusiasm has was beneficially tempered by the sharp and sudden rise in the cost of living.
We can clearly see this with the prices of gasoline and those of real estate, which undertook a necessary decline because they had reached peaks that were just as unsustainable as they were unhealthy.
Inflation will remain at the heart of concerns over the next year and will still dictate the course of action of the monetary authorities, but the effect of the rate hikes of recent months will also begin to be felt from the second half of the next year, with the radar well trained on what is to come.