Tack on this — “monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the two per cent target” — and you can see why the markets think the central bank has at least one more bullet in the chamber. The verbiage of “excess demand in the economy looks to be more persistent than anticipated” was just the cherry on the cake.
The bar has now been raised in terms of what gets the Bank of Canada to stop hiking rates. That is how far we have come in the past two months and change. The 25-basis-point hike took the policy rate up to 4.75 per cent, taking out the 2007 peak and taking it to the highest level since February 2001. Both periods presaged recessions, so the central bank will end up getting the recession it seems to think it needs to crush inflation to the holy grail target of two per cent.
Like the Fed, the Bank of Canada is squarely focused on lagging and contemporaneous indicators. Everything they are staring at was influenced by the crazy-easy policy the central bank pursued one and two years ago. Nothing it does today is going to have an impact on anything until we are well into 2024. And everything the Bank of Canada did last year, and it was significant, will not exert its most biting impact until we are into the summer and beyond.
The lags are important and have yet to play out. The central bank did exercise patience, but not enough.and putting the final interest rate nail into the coffin will end up burying the debt-heavy Canadian economy, a story we will be reading about later in the summer and fall. As we have repeatedly said, Canada has been very adept at providing a false glow by publishing decent gross domestic product data, but not telling the world that its economy is in secular decline when it comes to per capita GDP, or GDI. This came out loud and clear in the first-quarter productivity data, as real business output per hour worked contracted 0.6 per cent — a tad worse than expected. As in the U.S.
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