Was the Bank of Canada’s strike against inflation premature? — SkimNews
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- Bank of Canada raised its policy rate to 2.5% on Wednesday morning, a decision the authors argue the available data did not justify and that should have been a hold given economic slack and extreme uncertainty.
- Governor Tiff Macklem telegraphed the move at an Oct. 17 press briefing at the International Monetary Fund meeting in Thailand, lifting market odds of an increase from low to almost 90% ahead of the decision, according to Bloomberg data.
- Prima, the Bank of Canada's new projection model, finds that a short, sharp energy-price shock briefly lifts headline inflation with almost no pass-through to consumer prices, while a prolonged increase keeps inflation elevated for longer as firms pass higher costs on.
- Producer prices rose 14.5% in the year to September while raw material prices climbed 27%, the two figures the authors identify as key evidence supporting a hike.
- Inflation expectations in the Bank's Oct. 19 consumer survey reached almost 4% five years ahead, nearly matching the elevated one-year-ahead figure for the first time since the pandemic-driven surge.
- Headline inflation edged up from 3% in August to 3.1% in September, but core measures eased: CPI-trim fell to 1.8% and CPI-median to 1.9%, measures the authors cite as good short-term predictors that do not set off alarm bells.
- Parliamentary Budget Office cut its 2026 growth forecast to 0.9% from 1.1% on Oct. 20; the Bank estimates fourth-quarter growth would be halved to less than 1% if the new U.S. tariffs scheduled for Oct. 30 remain in place, and more than 40,000 jobs were lost in August followed by nearly 70,000 in September.
Why it matters: Canadian households and businesses now sit under a 2.5% policy rate the authors call unjustified: nearly 70,000 jobs were lost in September, and the Bank itself puts fourth-quarter growth below 1% under the Oct. 30 U.S. tariffs. With CPI-trim at 1.8%, the authors argue a hike worsens a slowdown the data already points to.
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