SLEEPLESS NIGHTS — Bank of Canada governor TIFF MACKLEM will raise interest rates this morning. The big question: After consecutive 50-point hikes, how high will Macklem go? The governor will make his announcement via "video link," a consequence of a recent bout with Covid. (The virus also kept an economist on Playbook's rolodex from commenting on the news of the day.) As of this morning, the bank's benchmark sits at 1.5 percent. Forecasters tell POLITICO to expect an increase of 75 basis points today. Scotiabank’s DEREK HOLT predicts another 75-basis-point increase at the Sept. 7 rate announcement. That'd bring the benchmark to 3 points before fall. As inflation rages and supply chains waver and Covid still injects uncertainty into the economic picture, ANDY BLATCHFORD put a question to prominent economists: When it comes to the state of the Canadian economy, what keeps you awake at night? Here's what we heard. MOSTAFA ASKARI, chief economist of the Institute of Fiscal Studies and Democracy: Inflation has become a main policy concern globally. There is significant pressure on central banks to use higher interest rates to bring inflation down closer to its target. At the same time, there are global drivers such as the global rise in oil and gas prices and the war in Ukraine that have raised prices and constrained supply. Higher interest rates cannot affect these global drivers of inflation. The main economic risk I see is that the Bank of Canada overreacts and raises interest rates too quickly and to levels higher than what is needed. If the bank cannot manage a soft landing, there would likely be significant negative impacts on households. Household debt is very high. Many families would not be able to absorb significantly higher interest rates. As well, higher interest rates work through slowing down demand and economic growth. This would likely lead to higher unemployment rates, which would be another blow to households, particularly those at the lower income brackets. PEDRO ANTUNES, chief economist of the Conference Board of Canada: Central banks in the United States, Canada and elsewhere are dealing with a problem we haven’t seen for roughly 30 years — very high inflation and rising inflation expectations. The issue that keeps me up at night is whether monetary policy will succeed in quelling inflation without hitting the economy too hard. Is a soft landing achievable? Our sense is that Canada’s economic outlook is in relatively good shape. While high inflation is eroding purchasing power for consumers just as elsewhere, exporters benefit from high commodity prices. The boost in export revenues is helping to offset the negative effects on consumers. While Canada is not likely to be first into recession, financial and equity markets are suggesting we could see a widespread downturn, which would undoubtedly bring Canada down with it. CHRIS RAGAN, economist and founding Director of McGill University's Max Bell School of Public Policy: First of all, I sleep very well, even when there are lots of unusual economic things going on! And there are certainly lots of economic things to think about. One is whether the net effect on Canada of the Russia-Ukraine war will be negative or positive; as terrible as it obviously is for millions of people, the effect of the war on energy and commodity prices is clearly good for an exporting country like Canada, and the question is whether the negative effect on commodity-importing nations (like the U.S.) will spill over to Canada sufficiently to offset the positive effect on our commodity exports. A second thing is whether inflation expectations will become sufficiently un-anchored, as it appears is happening, that the Bank of Canada will feel the need for continued aggressive rate increases. If those expectations continue to rise, it will take little time before a wage-price spiral really takes off, at which point reducing inflation becomes much more difficult. Another concern is what happens if and when inflation doesn’t respond fully to the bank’s rate increases, as is likely given that much of current inflation is driven by factors unrelated to domestic excess demand — such as supply-chain disruptions and war-driven rising commodity prices. What will happen to the bank’s credibility in the eyes of the public, once they are reminded of the limitations of central banks? Another issue is whether and to what extent the federal government will start thinking and talking about future fiscal challenges, and the need to adjust taxes and/or spending in order to create more fiscal space. Population aging, challenges in the health-care sector, the need for massive investments to drive a low-carbon transition — these things are all more-or-less certain to be part of our future. And of course there will be some future recession — maybe soon, maybe later — which will likely demand an aggressive fiscal policy response. All of these things point to the need for more fiscal adjustment very soon to make sure we have the fiscal space required to address these challenges. JIMMY JEAN, chief economist for Desjardins: What's really top of mind for me is the risk for central banks to let current public pressure and the optics of accelerating inflation prints in the next few months alter their rational judgment. That would be a recipe for an overdose of tightening medicine, leading to a harsher recession than what would be desirable. In addition, it may lead the BoC to respond more slowly and less aggressively than might be warranted to signs of a downturn, making it worse than what would be optimal. Not unrelated is my concern about the politicization of central banking in Canada, and the deliberate effort by some to erode the general public's trust in the Bank of Canada. The causes of the current high inflation are very complex, but scapegoat-searching has obviously led a lot of fingers to point at the Bank of Canada. I would also add to these concerns the survival of many smaller businesses. Many have been deeply wounded by the pandemic and some of them are not able to withstand the current pressures on margins. CEBA loans are going to come due soon and that may be the proverbial straw breaking the camel's back. The economy needs more capacity and that scenario would produce just the opposite. ARMINE YALNIZYAN, Atkinson fellow on the future of workers: I worry about the accumulating toll of pandemic, inflation, monetary policy and war, but these days it’s the tension between the potentially great and possibly cataclysmic economic options that are unfolding that keeps me up at night. We’ve never been so close to tackling our biggest challenges, including inequality and inadequate environmental, health and public protections. We could yoke the strengths of a powerful new cohort of young workers and breathtaking technologies to the momentum of population aging, extreme climate events and health/care systems in crisis. We could make every job a good job, the foundation of tackling everything else. Or we could let pandemic fatigue erode the hardest-won lesson from the past two years: we are interdependent, and our behaviors shape each others’ choices. Exhausted, we could fall for quick fixes and “me first” logic, the biggest barriers to resolving problems as a human race. I honestly don’t know what we’ll choose.
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