Money & Influence: Stabilizing Our Economy for Recovery

The Bank of Canada has announced Canada’s largest interest rate increase since 1998 in an effort to tame high levels of inflation. International events are impacting the price of commodities and increasing the cost of living and doing business as the Bank of Canada has noted, but a snapshot of the current state of our economy begins here at home with our own monetary policy. Throughout the pandemic, the Government of Canada turned on the printing press to inject hundreds of billions of dollars of liquidity into the economy. When the quantity of money grows in a market, prices often begin to soar due to inflation. If action is taken to tighten monetary policy, we tend to see a delayed effect on inflation as it begins to stabilize over time.

The insidious effect that inflation has on the economy should not be underestimated and should be addressed to minimize impacts on both consumers and businesses. When money supply grows too rapidly the effect on the economy is inflation, when the money supply decreases there is the risk of economic depression, therefore the aim of our central bank should be to grow our money supply slowly and with stability.  The answer to this is not to inject further stimulus into the economy by printing more money or continuing large government deficits. The answer is to stop these policies and aim for stability in our money supply.

Stimulus and government intervention within the economy is necessary from time-to-time. Government restrictions throughout the pandemic caused business closures and the loss of employment, therefore impacted individuals and businesses were compensated. But continued government intervention in the economy inevitably creates uncertainty for everyone. If our money supply deviates from a level of relative stability and rapidly increases or decreases, it impacts the price of goods and services and creates uncertainty for businesses on what the true price of their good or service should be. But when the money supply is stable and growing slowly, then the economy will have a level of certainty in which true supply and demand determine what a price should be—without the influence of our money supply distorting it.

The Bank of Canada is now playing catch up in the fight against inflation through interest rate increases while inflation surges throughout our economy. The current levels of inflation we are seeing is eroding the purchasing power of consumers, increasing the cost of doing business, and furthering inequality within society. It is imperative the Bank of Canada gets their next steps right. The Bank of Canada is now at the point where the only policy option they have is to raise interest rates to begin squeezing inflation out of the economy, but this also runs the risk of creating economic downturn. The potential for stagflation (the combination of economic stagnation and inflation occurring at the same time) is front of mind for every central banker dealing with soaring inflation that could create an economic calamity of joblessness, high interest rates, and rising prices that we saw in the 1970s. Monetary policy is a critical component of our economy. When managed effectively, it can help create an environment where businesses have stability and certainty on prices and consumption —otherwise it creates the economic uncertainty that is before us today.

Brandon Ellis is the senior policy manager at the Atlantic Chamber of Commerce, a nationally accredited business association representing the network of 90 chambers, 34 corporate partners, and more than 16,000 businesses in Atlantic Canada.