Interest rates are not likely to return to pre-pandemic levels any time soon. Not only because the central banks’ war against inflation is far from over despite the ongoing economic slowdown, but also because the world is changing.
If financial markets are to be believed, the Bank of Canada will have made an initial reduction in its interest rates by a quarter of a percentage point by June and perhaps even as early as April.
This impression is based in particular on the brake that its marked and brutal increase in the cost of money inflicted on economic growth and the slowdown in inflation that this induced. Desjardins Group analysts even said last month that the central bank’s key rate could decrease from 5% to 3.5% between spring and the end of next year to counterbalance a brief recession which is maybe already in progress.
Inflation still high
However, the Bank of Canada itself warns that it will probably not succeed in bringing inflation back to its 2% target before 2025 and that, by the middle of next year, the average annual increase in the cost of life will still probably be 3.5%.
This is because the price of housing in Canada continues to increase more quickly than was desired, due to the rise in interest rates, but also due to the chronic lag of supply behind demand, said the institution two weeks ago. It is also that the new crisis between Israel and Hamas will do nothing to reduce oil prices. And then, the latest inflationary surge has left its mark on the way companies set their prices as well as on workers’ wage demands, which will be difficult to bring back to a trajectory of 2% per year.
One thing is certain, Canadians should not expect the reduction in their central bank’s key rate to be as strong and rapid as its increase since March 2022, economists concluded around ten days ago. Nor that this rate will return to its pre-pandemic level, i.e. 1.75%, any time soon.
The end of an era
And then, beyond these cyclical factors, there is, more fundamentally, a general context which has changed and which no longer pulls prices down as before, but which rather exerts upward pressure, explain experts .
Who could believe now that one of the concerns of central banks in the years following the 2007 financial crisis was not to reduce inflation to 2%, but to increase it to 2%? recalled Agustín Carstens, director general of the Bank for International Settlements (BIS), last year.
In fact, without wishing to diminish the merit of the monetary policies of the last 30 years, which were able to maintain average inflation at exactly 2% where it was the target, it must be admitted that the general conditions were favorable, said Mr. Carstens. Starting with the downward effect on prices that the liberalization of trade, the relocation of production to countries with low labor costs and, particularly, integration into the economy have had. global economy of China, the former Eastern Bloc countries and other emerging economies with their 1.6 billion workers.
Today, the mood is more one of economic nationalism, the repatriation of production chains and geopolitical tensions with the great emerging powers, starting with China. In any case, the addition of 1.6 billion workers to the global economy is not the kind of event that we can hope to see repeated at will, emphasized in another speech in August , the right-hand man of banker Agustín Carstens at the BIS, Luiz Awazu Pereira da Silva, cited by the colleague at Duty Gérard Bérubé.
But that’s not all, explained the deputy director general of the BIS. There is also global warming, the consequences of which inflict increasingly significant costs on the economy and which leaves no other choice than to proceed with a green transition, the cost of which will also be added to the prices of goods. and services.
And then there are the growing wealth inequalities between individuals, which make monetary policies less effective. Indeed, the richer the households, the less sensitive their consumption and savings are to variations in central banks’ interest rates, which forces the latter to force the dose.
Likewise, the aging of the population in many countries is expected to result in rising health and care costs in addition to reducing the available workforce, all factors which will further push prices upwards. , argued in particular the economists Charles Goodhart and Manoj Pradhan in a work entitled The Great Demographic Reversal.
Necessary changes
It is in this context that renowned economists, such as the former chief economist of the International Monetary Fund Olivier Blanchard and the Nobel Prize winner in economics and columnist at New York Times Paul Krugman, reiterated this summer that central banks pursuing a 2% target would be ill-advised, reported The world in August. They fear in particular that by persisting in wanting to take “the last step” which separates inflation in their country from a rate of 3% to 2%, when so many structural factors are working against them, they will be obliged to hold the reins far too tight on economic activity.
Central banks have provided more than their share over the past decade. It is now the turn of other politicians to take over.
Central banks and governments should understand that, to have economic growth that is not too inflationary, it will not be enough to just play with interest rates or continue to hope that new country and armies of workers, concluded Agustín Carstens in his speech. Instead, we will have to learn to produce more wealth with the countries and workers we have, that is to say, improve productivity. “Central banks have provided more than their share over the past decade. It is now the turn of other politicians to take over. »
Improving productivity is unfortunately not Canada’s strong point. And this type of project, which is based in particular on the adoption of new technologies, on innovation and on the training of the workforce, takes, by nature, time to produce results.