Canadians are seeing the cost of borrowing rise rapidly as the Bank of Canada takes historic action to slow the soaring of prices, having learned costly lessons from history when central banks let inflation run rampant.
The Bank of Canada recently raised its key interest rate by a full percentage point — the largest single rate hike in more than two decades — as it tries to cool domestic demand and bring down inflation expectations.
An unusual move for an unusual time: inflation reached a 39-year-high of 8.1 per cent in June, after years of a low, stable and predictable consumer price index in Canada.
But throughout much of the 20th century, price stability wasn’t a given in the Canadian economy.
TD chief economist Beata Caranci said inflation today might feel especially challenging because Canadians have been shielded from inflation volatility for decades.
“We haven’t had this challenge in a while,” Caranci said.
Canada’s last experience with high inflation came in two waves during the 1970s and 80s and hit a peak of 12.9 per cent in 1981.
In 1973, adverse weather sparked a global food shortage and an embargo on OPEC oil drove energy prices up. Several years later, a second energy crisis was brought on by the Iranian Revolution in 1979.
And while the drivers of high inflation are relatively similar — global circumstances pushing up food and energy prices — inflation today isn’t expected to climb as high or be as persistent.
That’s because the approach of central banks is now markedly different, said Western University economics professor Stephen Williamson.
“A big difference now is sort of a strongly held notion that it’s mostly the job of the Bank of Canada to look after inflation control,” said Williamson. “In the 70s, that wasn’t true.”
For the bulk of the 20th century, central banks had not yet developed strong and effective mandates to maintain a stable reading of inflation, Williamson said. Instead, they tried to control inflation through the money supply.
Economists at the time believed inflation could be managed by controlling the amount of money circulating in the economy. However, central banks found this tactic to be unsuccessful.
Caranci said another reason why the Bank of Canada was slow to raise rates was that central banks were historically hesitant to hinder economic growth through higher interest rates.
TD senior economist James Orlando wrote an analysis in April that compared high inflation today to the 1970s and 80s. He said the Bank of Canada was slow to raise interest rates in the 1970s, and by the time the bank acted, it was too late.
“Inflation expectations adjusted upwards, resulting in even higher inflation over the subsequent years,” said Orlando.
Interest rates in the 1980s eventually rose to as high as 21 per cent.
In 1982, the Bank of Canada announced it would no longer target the money supply and instead would turn its focus to interest rates.
Canada’s turbulent experience with high inflation also led to the Bank of Canada’s mandate to maintain a target inflation rate. In 1991, the Bank of Canada and the minister of finance agreed on an inflation-controlled framework to guide monetary policy.
“We believe the Bank of Canada has learned from history,” Orlando wrote in his comparison of inflation in the two eras.
This time around, Canada’s central bank is still facing criticism for taking too long before starting to raise its key interest rate. By comparison, though, the Bank of Canada has acted faster and more forcefully.
“We’re hearing different dialogue coming out of the central bank today that there is a willingness to sacrifice growth, and to even have the unemployment rate rise,” said Caranci.
In its latest rate announcement on July 13, which surprised economists who were expecting a three-quarters of a percentage point hike, the central bank’s message was clear: it’s not afraid to move aggressively to clamp down on skyrocketing inflation.
At the same time, economists like David MacDonald from the Canadian Centre for Policy Alternatives have used history to warn raising rates too quickly can trigger a recession, as it did in the 80s.
However, Caranci said there are important differences between the two time periods, including a different makeup of the economy and the existence of safeguards such as mortgage stress tests.
“The challenge with doing comparisons of periods, especially when you get that far back in history is, there’s been so many differences at play,” said Caranci.
In May, Bank of Canada deputy governor Toni Gravelle delivered a speech that focused on why comparisons between stagflation in the 1970s and the current inflation environment were “unjustified,” citing strong economic growth, a tight labour market and historically low unemployment.
And of special importance, Gravelle said today’s Bank of Canada is equipped with the policy tools it needs to rein in inflation.
“Since the 1990s, we and other central banks around the world have had success with inflation targeting,” he said. “And we are committed to bringing inflation back to target.”
This report by The Canadian Press was first published July 21, 2022.
MONTREAL – Travel company Transat AT Inc. reported a loss in its latest quarter compared with a profit a year earlier as its revenue edged lower.
The parent company of Air Transat says it lost $39.9 million or $1.03 per diluted share in its quarter ended July 31.
The result compared with a profit of $57.3 million or $1.49 per diluted share a year earlier.
Revenue in what was the company’s third quarter totalled $736.2 million, down from $746.3 million in the same quarter last year.
On an adjusted basis, Transat says it lost $1.10 per share in its latest quarter compared with an adjusted profit of $1.10 per share a year earlier.
Transat chief executive Annick Guérard says demand for leisure travel remains healthy, as evidenced by higher traffic, but consumers are increasingly price conscious given the current economic uncertainty.
This report by The Canadian Press was first published Sept. 12, 2024.
Dollarama Inc.’s food aisles may have expanded far beyond sweet treats or piles of gum by the checkout counter in recent years, but its chief executive maintains his company is “not in the grocery business,” even if it’s keeping an eye on the sector.
“It’s just one small part of our store,” Neil Rossy told analysts on a Wednesday call, where he was questioned about the company’s food merchandise and rivals playing in the same space.
“We will keep an eye on all retailers — like all retailers keep an eye on us — to make sure that we’re competitive and we understand what’s out there.”
Over the last decade and as consumers have more recently sought deals, Dollarama’s food merchandise has expanded to include bread and pantry staples like cereal, rice and pasta sold at prices on par or below supermarkets.
However, the competition in the discount segment of the market Dollarama operates in intensified recently when the country’s biggest grocery chain began piloting a new ultra-discount store.
The No Name stores being tested by Loblaw Cos. Ltd. in Windsor, St. Catharines and Brockville, Ont., are billed as 20 per cent cheaper than discount retail competitors including No Frills. The grocery giant is able to offer such cost savings by relying on a smaller store footprint, fewer chilled products and a hearty range of No Name merchandise.
Though Rossy brushed off notions that his company is a supermarket challenger, grocers aren’t off his radar.
“All retailers in Canada are realistic about the fact that everyone is everyone’s competition on any given item or category,” he said.
Rossy declined to reveal how much of the chain’s sales would overlap with Loblaw or the food category, arguing the vast variety of items Dollarama sells is its strength rather than its grocery products alone.
“What makes Dollarama Dollarama is a very wide assortment of different departments that somewhat represent the old five-and-dime local convenience store,” he said.
The breadth of Dollarama’s offerings helped carry the company to a second-quarter profit of $285.9 million, up from $245.8 million in the same quarter last year as its sales rose 7.4 per cent.
The retailer said Wednesday the profit amounted to $1.02 per diluted share for the 13-week period ended July 28, up from 86 cents per diluted share a year earlier.
The period the quarter covers includes the start of summer, when Rossy said the weather was “terrible.”
“The weather got slightly better towards the end of the summer and our sales certainly increased, but not enough to make up for the season’s horrible start,” he said.
Sales totalled $1.56 billion for the quarter, up from $1.46 billion in the same quarter last year.
Comparable store sales, a key metric for retailers, increased 4.7 per cent, while the average transaction was down2.2 per cent and traffic was up seven per cent, RBC analyst Irene Nattel pointed out.
She told investors in a note that the numbers reflect “solid demand as cautious consumers focus on core consumables and everyday essentials.”
Analysts have attributed such behaviour to interest rates that have been slow to drop and high prices of key consumer goods, which are weighing on household budgets.
To cope, many Canadians have spent more time seeking deals, trading down to more affordable brands and forgoing small luxuries they would treat themselves to in better economic times.
“When people feel squeezed, they tend to shy away from discretionary, focus on the basics,” Rossy said. “When people are feeling good about their wallet, they tend to be more lax about the basics and more willing to spend on discretionary.”
The current economic situation has drawn in not just the average Canadian looking to save a buck or two, but also wealthier consumers.
“When the entire economy is feeling slightly squeezed, we get more consumers who might not have to or want to shop at a Dollarama generally or who enjoy shopping at a Dollarama but have the luxury of not having to worry about the price in some other store that they happen to be standing in that has those goods,” Rossy said.
“Well, when times are tougher, they’ll consider the extra five minutes to go to the store next door.”
This report by The Canadian Press was first published Sept. 11, 2024.
TORONTO – The U.S. Consumer Financial Protection Bureau has ordered TD Bank Group to pay US$28 million for repeatedly sharing inaccurate, negative information about its customers to consumer reporting companies.
The agency says TD has to pay US$7.76 million in total to tens of thousands of victims of its illegal actions, along with a US$20 million civil penalty.
It says TD shared information that contained systemic errors about credit card and bank deposit accounts to consumer reporting companies, which can include credit reports as well as screening reports for tenants and employees and other background checks.
CFPB director Rohit Chopra says in a statement that TD threatened the consumer reports of customers with fraudulent information then “barely lifted a finger to fix it,” and that regulators will need to “focus major attention” on TD Bank to change its course.
TD says in a statement it self-identified these issues and proactively worked to improve its practices, and that it is committed to delivering on its responsibilities to its customers.
The bank also faces scrutiny in the U.S. over its anti-money laundering program where it expects to pay more than US$3 billion in monetary penalties to resolve.
This report by The Canadian Press was first published Sept. 11, 2024.
