Bank of Canada and productivity
Did the Bank of Canada just throw the government under the bus?
That was a question from a colleague after the central bank’s No. 2 official – Carolyn Rogers – gave a speech on Tuesday calling attention to Canada’s awful productivity numbers.
Some saw it as a criticism of Prime Minister Justin Trudeau’s economic record, which may be why this one speech received such a large reaction from the media and politicians. (Speeches and reports on Canada’s falling productivity haven’t been exactly sparse).
Why did this speech get so much attention? Perhaps the language used by Rogers to describe the situation was more candid than typical from the Bank of Canada.
At a time when the governing Liberals are being widely panned for their record, this statement from Rogers is a provocative one: “You’ve seen those signs that say, ‘In emergency, break glass.’ Well, it’s time to break the glass.”
And it’s getting the Trudeau critics all riled up. See this post on X from Saskatchewan Premier Scott Moe.
The central bank, led by the very technocratic Tiff Macklem, wasn’t trying to wade into politics. So what message was it trying to convey?
With the economy struggling under the weight of higher rates, the central bank is under a lot of pressure from politicians and the public to cut borrowing costs quickly. And Macklem probably will start cutting soon, as early as June. But before then, he wants to keep expectations at bay until he sees even more evidence that inflation has been brought under control.
Enter productivity. Canada’s falling productivity means the economy can’t grow very fast without triggering inflation. In a low productivity economy, businesses are less able to absorb higher costs, and they are more likely to pass on these costs to consumers. Thus higher inflation.
And because of the higher inflation threat, interest rates need to remain higher than would have otherwise been the case had our productivity record been stronger. Rogers’ comments are simply a hawkish statement about future policy settings.
Still, markets and economists are pricing in about a percentage point of rate cuts this year, and another half point in cuts early next year. So, over the next year or so, we can see a full 1.5 percentage cut in rates. That would bring the policy rate to about 3.5 per cent, and prime rates offered by commercial banks to just under six per cent.
