It was the news Canadians were dreading. As the Bank of Canada raised the interest rate to 5 per cent, hearts sank and anxiety rose for workers and their families.
The hike will prove to be a disaster. It will not solve the affordability crisis and it will not have an influence on inflation. Instead, it will continue to force housing costs even higher and will not address the causes of the rising price of food (ahem, profiteering) at all. But it will cause hardship.
Food and shelter alone drove two-thirds of the inflation consumers experienced in May. Food and housing. Essentials for Canadians.
Statistics Canada recently reported that mortgage interest costs were the largest single contributor to inflation in June. How does raising the interest rate a 10th time in a year and a half solve this? It doesn’t — it makes it worse.
A quarter of homeowners in Canada hold a variable rate mortgage. Thousands more have recently renewed or will renew their mortgage in the next few years, increasing mortgage payments dramatically. Many mortgage holders are landlords, leasing out their properties to renters. They will take the opportunity to raise rents to cover the additional cost. Again, driving up prices even further.
Interest rates can’t fix housing costs and they won’t take one bite out of food inflation. So why is the Bank of Canada continuing down this path?
The only answer is reliance on old orthodoxy that believes forcing pain on the working class through slow job and wage growth (eventually leading to job loss and a recession) and unemployment is the only way to deliver a healthy exit from this inflationary period.
Unfortunately, this orthodoxy is dead wrong. And without a course correction workers are going to pay the price.
The aim of interest rate hikes is to slow economic growth. What does that mean? Higher unemployment, slower job growth or, worst case scenario, a recession that causes extensive job loss and leaves permanent scars.
The Bank of Canada says the underlying causes of the remaining inflation are low-unemployment and “high” wage growth, households having too much savings (and using it) and population growth (which causes demand for housing to increase).
In the same media conference, they say the result of these underlying pressures is that corporations are still raising their prices too often. And yet, the Bank refuses to tackle the big elephant in the room: corporate profiteering.
Well, I have news for orthodox thinkers. Each and every time a business raises their prices they are making a decision. And many of those decisions have resulted in higher profit margins.
Profits as a share of GDP have averaged 21 per cent since the start of the pandemic and profit margins are higher too. At the same time, workers have lost purchasing power and after adjusting for inflation, wages have just not kept pace.
Crises result in opportunities and there were so many opportunities that could have been taken up coming out of lockdowns and getting back to more regular life. They included the opportunity to build a more equitable and resilient world. Instead, policymakers at all levels are allowing corporations to get away with their own opportunism, siphoning more of workers hard earned cash for their own bank accounts.
And now the Bank of Canada is diverting that hard earned cash and making life even more unaffordable.
If the Bank of Canada continues down this path and federal and provincial governments continue to avoid taking action in their own spheres of responsibility, the ultimate result will be higher income and wealth inequality. Higher profit margins will be normalized and many workers will think they are asking for too much when they demand an income that allows them to survive, much less thrive. What a joke.
In the beginning of this rate cycle, the public was led to believe that the Bank was attempting to achieve a soft landing. No one believes that now.
Inflation fell to 3.4 per cent in May. Unemployment ticked up to 5.4 per cent. The job vacancy rate is easing and wage growth is slowing. Canada doesn’t need more unemployment or slower wage growth to solve inflation. We need more housing and it needs to be affordable. We need living wages and secure full-time jobs for people to thrive.
We need policymakers at every level to address the real causes of excess/persistent inflation — profiteering, financialization, undersupply and supply chain bottlenecks. Without that we’re all left worse off regardless of the level of inflation.
Lana Payne is Unifor national president.
Source: Toronto Star
