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Editor's Edition: The Bank of Canada's biggest challenge

The Bank of Canada's decision to hike its benchmark rate by 100 basis points in July came as a surprise to economists, who were largely expecting the central bank to issue a 75 basis point increase instead.

It's a move that signals how seriously the central bank is taking the inflation challenge currently facing the country, and one that will significantly effect the economy and households across the country, says the Public Policy Forum's Sean Speer.

"The bank could be criticized, I think, for being slow to identify the growing risk of inflation and then to respond to it," Speer said.

Video Transcript


ALICJA SIEKIERSKA: Welcome to "Editor's Edition." I'm Alicja Siekierska. On today's episode, many Canadians are rolling up their sleeves to receive a fourth dose of the COVID-19 vaccine. We'll take a look at this latest vaccination effort and how it compares to previous ones.

And the Bank of Canada hiked its benchmark interest rate by a full percentage point, a move that came as a surprise even as the bank is trying to rein in skyrocketing inflation. We'll discuss what that rate hike means for Canadians. And inflation is accelerating. We're going to take a look at what that means for climate policy and the effect it may have on rising prices.

Now to discuss all this, I'm joined by Sean Speer. Sean is a fellow in residence at the Public Policy Forum and he was Senior Economic Advisor to Prime Minister Stephen Harper. And he's here to help us dig through the policy issues shaping the post-pandemic world. Sean, welcome back to the show.

SEAN SPEER: Thanks for having me, Alicja.

ALICJA SIEKIERSKA: OK, so fourth doses of COVID-19 vaccines have started to roll out across the country as eligibility is expanded. A few hours from the point where we're recording this, Alberta actually just opened up its eligibility for fourth doses. Now many provinces had planned on waiting until the fall to open up boosters to wider swaths of the population when vaccines targeting the Omicron variant are expected to be ready. But with cases on the rise, provinces like Ontario and Alberta have pushed forward the rollout. Sean, what do you see as the big challenge in this vaccine campaign compared to previous iterations?

SEAN SPEER: I would say two words. The first is fatigue and the second is urgency. Viewers will know in the second half of 2021 there was a real urgency on the part of Canadians to get vaccinated because that unlocked our participation in the economy and society more broadly. But it's urgency has diminished since the-- the summer of 2021 and been replaced by a kind of growing fatigue, not just with vaccinations, but with the pandemic more generally.

And so it seems to me the biggest challenge facing policymakers and public health officials is how to overcome that fatigue and restore that sense of urgency and momentum in order to keep up the high impressive rates of vaccination that we've managed to achieve as a country since vaccines became widely available in the first half of 2021.

ALICJA SIEKIERSKA: And it certainly I think reflects just the time that we're in right now and the fact that vaccine mandates have been lifted. And you're right, there isn't that sort of urgency. But I think also there is some confusion around the messaging of the fourth doses and the necessity of it. Here's what Ontario's Chief Medical Health Officer Dr. Kieran Moore said at a press conference last week.

"You may get a second booster dose, but it's not a should. We have persistent and powerful immunity stretching past six months in younger and healthier people, so it's not an obligation to get a second booster dose." But then there are other doctors that we're seeing out there saying, go get it now.

This is something you should do. So I think there is a little bit of confusion at play here, Where does that leave people? And do you think this is something contributing to this varied uptake from the previous rounds?

SEAN SPEER: I think the short answer is, yes, Alicja. You know, given the lack of urgency and the growing fatigue that we've been talking about, it seems to me that the margin for error in terms of messaging and communications from public health officials is even smaller than it's been at different times in the pandemic. And so I found Dr. Moore's comments last week extraordinary.

Not only are there the comments that you referred to earlier. And as I interpreted him, he was almost encouraging people to undertake something of a kind of individual cost benefit analysis of whether to get vaccinated or stay-- or not get a booster in the name of avoiding potential health risks from the vaccine. That's a completely different message than we've heard for the past several months.

I mean, just think about it, Alicja. There was a time when we were precluding people from working, from traveling, et cetera, if they weren't prepared to get vaccinated. At that point, we weren't talking about individual cost benefit analysis.

So I guess it's a long way of saying, not only do I think that Dr. Moore's comments probably have harmed the kind of public momentum around boosters, it seems to me that they are a boon to anti-vaxxers across the country who now have a proof point from a major public health voice in the country that there is considerable risk associated with getting vaccinated that people ought to be thinking about. It really does reinforce the need for kind of greater precision from our public health officials as the vaccination effort continues.

ALICJA SIEKIERSKA: And you are seeing that kind of messaging already reflected in people's approach to the vaccine. There was a recent Angus Reid survey that found that while half of Canadians surveyed said that the provinces should provide fourth doses for adults as soon as possible, it does seem that more people are becoming more hesitant when it comes to the fourth dose.

Those who have received three doses, that willingness to get another shot remains high, but those who have received just one or two, which many health experts have said is no longer enough to be inoculated against COVID, that just 17% of those people said that they would seek another dose. And so what do you think public health officials in particular here need to do to improve on that messaging that you say is potentially flawed or risks different sentiments and discouraging people from getting vaccinated?

SEAN SPEER: It's a big challenge. I don't know if you're experiencing this in your own life, Alicja. I suspect this resonates with viewers. Even just this past weekend, I encountered someone who just nonchalantly mentioned that they had been exposed to COVID a couple of days earlier. You know, months ago that person would have instinctively isolated, and in this case, it was something that the individual brought up as a kind of something that was barely on their mind.

So there is a kind of general complacency that is reinforced by mixed or confusing messages. And so I would make kind of a couple of points on what I think needs to happen. The first is, as we've just discussed, is we cannot have our public health officials or politicians starting to speculate about the risks of vaccination outweighing the benefits.

But kind of more concretely, it seems to me, we can't take our foot off the gas. We've seen ongoing issues in our health care system. If we saw a spike in cases, there's a reasonable chance that the system would again face the risk of collapse. So I think the government needs to continue to communicate urgency.

And I would just finish by saying, it seems to me the key message here can't just be about individual benefit. There has to be a kind of a solid touristic aspect to messaging, communicating to people that, well, the risk of serious issues or even death is increasingly minimized by the vaccines. The risk of widespread, particularly for those who are more at high risk, is something that we all need to be vigilant about.

ALICJA SIEKIERSKA: And messaging that worked. When the vaccines were first rolled out, that was very much part of it and resonated with Canadians. So I think we'll definitely keep an eye on that, especially as we go into the fall and those vaccines that are targeting Omicron variants specifically are expected to be ready. We'll see how that vaccine rollout works out and if the messaging does change from our public health officials.

But Sean, I want to talk about another big announcement that was made in the past week, and that was when the Bank of Canada surprised markets and economists last week and hiked its benchmark interest rate by a full percentage point, bringing the rate to 2.5%. That's a level that we haven't seen since 2008 and it was the biggest single increase since 1998. Now there's a lot to unpack with this decision, but it certainly reflects how significant inflation-- the inflation challenge is today. Here's what Bank of Canada Governor Tiff Macklem had to say about the decision.

TIFF MACKLEM: The biggest risk, in our view, is that Canadians could start to believe that the high inflation we have today is here to stay. And if that happens, if expectations of high inflation become entrenched, we will have to interest rate-- raise rates more and slow the economy more to get inflation back to target. By moving-- by front-loading we're trying to avoid that scenario.

ALICJA SIEKIERSKA: Now this is something we've discussed on the show, particularly in terms of government policies and the impact they could have on inflation and the challenge before the Bank of Canada. But what do you think Governor Macklem is aiming to do with this kind of super-sized hike that we haven't seen for quite some time?

SEAN SPEER: Yeah, I take him at his word that he's trying to stop a price wage spiral here. Governments across the country, Alicja, as you know, are about to embark on pretty major collective bargaining with public sector workers in health care, education, and the core public service. We've already seen PSAC and other major public sector unions calling for significant wage increases to offset the costs of inflation.

And I think what Macklem is doing here, what the bank is aiming to do, is to try to break the back of inflation as soon as possible so as to avoid the likelihood that governments give in to those demands, and in so doing, risk making inflation longer and a more significant problem. But-- and this is an important but-- even if one accepts that that's the right thing to do from a macroeconomic perspective, there are going to be costs and consequences for Canadian households.

In the aftermath of that rate hike, Alicja, five-year mortgage rates were posted at something like 5 and 1/4%. That's significantly higher than a lot of people who may be having five-year mortgages come up that were previously set at something approximating historic lows.

For those with variable mortgages, they're about to see a pretty significant month-over-month increase in their household costs. So in a way, the governor was kind of damned if he did, damned if he didn't. But the effects of this are going to be really significant for the economy as a whole and for households more specifically.

ALICJA SIEKIERSKA: And of course, it comes at a time of high inflation. So kind of doubly adding onto those costs that households are already facing. We've spoken on this episode a lot about how crucial clear communication is when it comes to policies. And so I do want to kind of dig into the bank's communication a bit here, especially around that decision to make it a full percentage hike, because in the days leading up to this, markets and economists widely expected that it would be a 75 basis point hike that was already baked into the markets.

And so there wasn't any real warning that the hike would be more than that. And so that was clearly part of the bank's and the governor's decision to kind of surprise markets here and show that perhaps they are being more forceful than people expected. I mean, how do you interpret that surprise nature of this hike?

SEAN SPEER: Yeah, I think it speaks to the expectations game that Governor Macklem talked about. And it does signal that, well, the bank could be criticized, I think, for being slow to identify the growing risk of inflation and then to respond to it. This signals that the bank is indeed seized by these issues.

You know, it's kind of funny, Alicja, on previous episodes, before we found ourselves in this moment of rising inflation, there was a lot of debate about whether the bank's mandate ought to be focused on things like climate change, or inequality, or any a number of secondary matters. But what's interesting to me, and I suspect is somewhat interesting to viewers, is when push comes to shove, you can kind of see what really matters.

And I think the bank, in a way, has been kind of scared straight in taking inflation seriously and being prepared to use the tools at its disposal to address the problem. I think the criticism that it's taken too long is probably fair, but for now, the bank is trying to stay ahead of expectations. And in that sense, I think the decision last week was the right one.

ALICJA SIEKIERSKA: And you can see that too, the importance of inflation above, or reining in inflation above all else, in some of the comments that were made. The governor was asked about the impact on the housing market, which you're already seeing starting to cool. Of course, prices are still high, but they've dropped from the records that we saw just a few months ago.

And essentially what the Bank of Canada has said is that we need to do this in order to tame inflation. And so it is raising the prospect of a recession and tampering that demand so much that it will slow what is already pretty tepid growth and potentially throw us into a recession.

So is there something that the government should be doing now in order to make sure that if there is a recession, it is as shortlived as possible and that we get that soft landing that we've been hearing so much about in the last several weeks? How should the government approach this prospect?

SEAN SPEER: I think there are limits on the government here. And to be frank, there are even limits on the Bank of Canada's capacity to kind of engineer an outcome in which we end up with inflation coming down and avoiding a recession. I mean, fundamentally, a lot of these outcomes will be shaped by what happens in the United States, of course, where inflation continues to move in a worrying direction I think we're having this conversation about a week or so after discovering the inflation rate was 9% last month in the US.

I think we're going to see even more marked action from the central bank there to try to deal with the problem that I think a lot of people thought had plateaued, and yet it continues to move in the wrong direction. So it's not to sideswipe your question.

I think it's a legitimate one, but it just seems to me in a lot of ways, given our interdependence on the US economy, when we look back at this experience, whether or not we ended up in a recession probably will matter less on government policy and more on the American's ability to kind of navigate this complex challenge of getting inflation under control without precipitating a significant drop in economic activity.

ALICJA SIEKIERSKA: And obviously, the Bank of Canada is separate from the Federal Reserve in the US. But I also wonder how much that super-sized hike was trying to get ahead of where they're going to be, given their inflation rate hit 9.1% last month. And we're actually recording the show before Statistics Canada releases inflation data for the month of June, but it's a pretty safe bet that the Consumer Price Index is going to be high. As you can see in this chart of inflation over the last five years, it is on the rise.

And Governor Macklem said he expects inflation to remain high, above 8%, for coming months. Most economists have forecast that it will hit the 8% threshold in the month of June. We saw gas prices soar, if you'll recall.

That's a level we haven't seen in decades, and it's obviously having an impact on household budgets across the country. This is obviously a challenge for the Bank of Canada. But I mean, how are you seeing this challenge for the government and how it's going to be shaping its policies for the coming months?

SEAN SPEER: I am-- in another part of my professional life, I do a biweekly interview with David Frum, the American journalist and commentator. Something he said to me a couple of weeks ago is, inflation, particularly inflation that's followed by a recession, is just absolutely deadly for incumbent governments. And so I think the Trudeau government in Ottawa, provincial governments across the country, have to be feeling vulnerable because Canadian households are feeling vulnerable.

One topic we've discussed at different times over the past several months, Alicja, is the state of household finances. They improved on the margins during the pandemic, in part because of government benefits, in part because of course, consumer spending was down. But at a kind of fundamental level when it comes to housing, student debt, credit card debt, et cetera, a lot of people were already in pretty tight spots.

And if we see rates that continue to rise, it's going to put a lot of households under pressure and some underwater. So it just seems like we were moving from one crisis to another these days. And if that's the way I feel, I suspect that's the way a lot of households feel. And as I say, that is a risky spot to be in if you are sitting on the government side of the legislature.

ALICJA SIEKIERSKA: We had a Yahoo/Maru public opinion poll that was released not too long ago that showed that a majority of Canadians actually believe both Prime Minister Justin Trudeau and Finance Minister Chrystia Freeland do not have a plan to tackle inflation. And so how does the government change that perception? What should they be doing at this point?

SEAN SPEER: Well, there's the kind of political question and then there's the policy question. You know, the truth is, the policy question, the policy answer, would be to try to make the Bank of Canada's life as easy as possible in terms of getting inflation under control. And that means not flooding the zone with more deficit financed dollars.

The political answer in some ways may be in conflict with that policy approach. I think there will be growing pressure for the government to try to mitigate the impact of rising prices across different parts of the consumer economy. One area in particular that I think will be the subject of growing pressure is the government's carbon tax.

Viewers may know that we have a national carbon tax framework that sees the rate go up by $10 per ton on an annualized basis. The government moved ahead with the increase back in January, even though there were some calls from opposition politicians to suspend the increase.

I suspect going into 2023 those calls will be even louder, especially if Pierre Poilievre becomes the leader of the Conservative Party in September. And it'll be an interesting moment, Alicja, whether the government blinks and suspends the increase or plows ahead in the name of good policy, even if it comes at serious political risk.

ALICJA SIEKIERSKA: I think that I-- it's interesting to take a look at the inflationary challenge as the government tries to make good on its climate promises because they are aiming to cut emissions between 40% to 45% below 2005 levels by 2030, and then targeting net zero emissions by 2050. As you said, part of the government's plan to do that is through the carbon tax, which we've discussed on the show is explicitly trying to make it more expensive to do things like fill up a tank of gas, but that also could contribute to inflation.

And the green transition too is going to cost more, making that switch from fossil fuels and through the implementation of new technology. So how do you see the government balancing this challenge of an ambitious climate plan while also not contributing to inflation or adding to that? Is it possible to kind of do both in this moment?

SEAN SPEER: I think the short answer is no. Research by Desjardins, the Quebec-based bank, shows that the government's climate agenda does have inflationary consequences. And that's kind of intuitive, right? I think people kind of instinctively understand that.

That when you're trying to catalyze a whole new energy capacity and sector that there are going to be costs associated with that. That there is no free lunch, as economists like to put it. It kind of comes back to a point I made earlier about the Bank of Canada's mandate that when times are good and people are feeling generally optimistic about the economy as a whole in their own personal finances, they have the ability to kind of focus on secondary concerns or secondary issues. And it's in those circumstances where we see climate change rise as a political priority in public polling.

As household budgets tighten and as we potentially fall into a recession, one can't help but think that Canadians' concerns about the environment will fall in turn and demands for short-term help on some of these price issues will trump long-term concerns about the environment, which just at a fundamental level, has always been the biggest challenge with ambitious climate action.

That the long-term benefits of meeting our emissions targets are significant, but they are benefits that won't fully accrue for decades. And even then, calling them benefits is a bit complex because what we're really talking about is that we won't suffer these negative consequences, right, of climate change, and global warming, et cetera.

And you kind of-- that in some ways is in conflict with the immediate short-term costs of action, especially against a backdrop of challenging economic circumstances. So I guess it's a very long way-- I apologize for rambling-- but a very long way of saying that I think will be a limit on the part of Canadians to accept rising costs associated with the long-term goals of climate change when they're facing really short-term pressures on their household budgets.

ALICJA SIEKIERSKA: Yeah, I think there's always been the expectation that there is no such thing as a free lunch. This is going to cost money to make these changes. But having it come at a time when inflation is potentially above 8% and food is more expensive, gas is more expensive, everything is more expensive, do you think that fact is a threat to these plans right now?

SEAN SPEER: I think they are. But rather than just sound a negative note, let me just say, I've always thought, Alicja, that the climate agenda has been kind of miscommunicated, not just by this particular government, but by governments, and activists, and others. You'll remember that when the Trudeau government was first elected, then Environment Minister Catherine McKenna typically talked about how the environment and the economy go hand-in-hand. And I'm not sure that was a really persuasive argument.

You know, it seems to me the way to build broad-based political support is to paint a kind of aspirational picture of the future. I'm reminded, for instance, of former US President John Kennedy's goal of getting to the moon within the decade of the 1960s. It was a big kind of audacious goal on the part of the country as a whole. It touched on various sectors of the economy, different regions within the country.

It was really a kind of collective vision of the future that even if you weren't involved in the space program, you were invested as a citizen of the country. And it seems to me the goal of net zero emissions, in particular, which is an audacious goal. I mean, it really does mean kind of fundamentally restructuring our industrial base. It's going to require not just kind of a marginal set of policies, like, 10% increase per ton of the carbon tax here or there.

It's going to require a kind of an accompanying message and vision that meets, that matches, that kind of level of audaciousness. And I wonder if the government found its voice like that if people were prepared to live a bit more with some of these short-term trade offs as part of this longer term aspirational vision. And I think that's been lacking on the climate change file, even before our current economic circumstances.

ALICJA SIEKIERSKA: Well, I think it'll-- we'll certainly see that these two major topics, that affordability crisis, as well as climate change policy, remain at the forefront. And we'll see how those two overlap or what the tension is going forward, especially in the future as we perhaps get closer to elections, whenever that happens.

But Sean, before we wrap up, we've discussed a lot on the show the chaos at Canadian airports. Part of the government's response initially was to delay-- or to deal with the delays is to lift the vaccine mandates, as well as put a pause on the random COVID-19 testing.

Well, the testing is now back, although it's a little bit different. They have moved it away from airports. So those people arriving on international flights to Toronto, Vancouver, Montreal, and Calgary can be randomly selected to do a COVID-19 test. And so, Sean, what do you make of Ottawa's decision to actually bring back this random testing, even as the issues at Canadian airports have really not gone away so far?

SEAN SPEER: Yeah, I'm grateful to you and your colleagues at "Yahoo Finance" for the reporting that you've done in recent weeks on what's going on at our airports. I think if you're like me, you know that there are these extraordinary delays and they've been enormously disruptive for people, but it's been hard to make heads or tails of what's going on and who's ultimately-- what factors have contributed to the delays and who's ultimately responsible.

I must admit, Alicja, that I found this decision a bit perplexing. At a moment when the government is facing growing demands to scrap the ArriveCan app and take other steps to try to expedite the travel experience to now add another layer of friction, even if it's done off-site. It just strikes me as it's hard to kind of fully understand.

I must admit, you mentioned that I worked for the former prime minister. So viewers can take this as they see fit. But I've just generally found the transportation minister's messaging on the airports issue a bit confounding. His-- at different times he's blamed passengers for seemingly forgetting how to travel over the pandemic.

And now adding another layer of friction just seems to me to be kind of taking on political responsibility for the delays rather than coming up with policy approaches that could reduce them. So I guess that's a long way of saying, I can't-- if listeners are confused-- or viewers, rather, are confused about this decision, I can't-- I'm not going to be the source of clarity.

ALICJA SIEKIERSKA: I think a lot of the experts and different stakeholders around the airport delays were really hoping that this would be a permanent move. And so I think the fact that it is away from the airports and not actually happening there and bogging down the arrivals process, further than it already is, is perhaps a positive. But I think from a policy perspective, it's been unclear why the government is continuing to pursue this, or perhaps that's kind of messaging that they-- they could make more clear.

But Sean, that is all the time that we have for today. Thank you again so much for joining us.

SEAN SPEER: It's always a pleasure, Alicja.

ALICJA SIEKIERSKA: And as always, if you're looking for the latest business news, please check out the "Yahoo Finance" Canada website. And if you have any questions or feedback about the show, please feel free to email me. I'm at Thanks for watching.