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Bank of Canada taught by history about high inflation – CTV News
OTTAWA –
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.
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The Royal Canadian Navy is offering a one-year trial period for Canadians to join with “no strings attached” as it faces a major recruitment challenge and unprecedented personnel shortage.
Under the new program launched Friday, Canadian citizens and permanent residents can join the navy on a year-long contract – either full-time or part-time – and then leave if they wish to after that.
Those who decide to stay on will be transferred to a naval trade.
Applications are open to people aged 16 to 57 years.
New recruits will undergo an eight-week basic military training and naval environmental training, in either Halifax, N.S., or Esquimalt, B.C., according to a media release by the Royal Canadian Navy.
“Life in the Navy can be demanding and challenging at times – it is not for everyone and that’s why the new Naval Experience Program gives participants the chance to experience life in the Navy, for one year, no strings attached,” said navy commander Vice-Adm. Angus Topshee, in a statement.
The salary will be equivalent to entry-level positions within the private sector, with paid rations and quarters, the RCN said.
The Canadian Armed Forces are in the midst of a recruiting crisis, with officials admitting that the number of applicants coming forward each month is about half what the military needs to meet its targets.
In an interview with The Canadian Press last year, Topshee said about 17 per cent of navy positions – equivalent to about 1,400 sailors – were vacant, as of September 2022.
“We need more people. We need them as quickly as we can get them,” he said at the time.
Amid the staffing crunch, the navy has started deploying less-experienced sailors on operations and eliminating certain positions as it struggles.
Meanwhile, the Canadian Forces in recent years have also been shaken by what experts have called a sexual misconduct “crisis.”
Defence Minister Anita Anand pledged to reform the military’s culture in “an ambitious roadmap” that was unveiled in December.
A review was formally launched in response to exclusive reporting by Global News into allegations of sexual misconduct at the highest ranks of the Canadian Armed Forces.
— with files from The Canadian Press
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Eight people are dead after they tried on Thursday to cross the St. Lawrence River into the United States near Akwesasne — a community which straddles Quebec, Ontario and New York state — according to officials. One other person is still missing.
Police recovered two more bodies from the river Friday, after discovering six bodies and an overturned boat during a missing person search Thursday afternoon.
The bodies are those of six adults and two children: one under the age of three who had a Canadian passport, the other an infant who was also a Canadian citizen, according to Shawn Dulude, the police chief for the nearby Kanien’kehá:ka community of Akwesasne. Dulude spoke to reporters at a Friday news conference.
They were found in a marsh on the riverbank.
They are believed to have been an Indian family and a Romanian family who were attempting to cross into the U.S., according to police.
Casey Oakes, 30, an Akwesasne resident, remains missing, police said. Oakes was last seen on Wednesday around 9:30 p.m. ET boarding a small, light blue vessel, leaving Cornwall Island. He was dressed in black, wearing a black face mask and a black tuque.
WATCH | Dulude speaks about the victims:
Shawn Dulude, the chief of the Akwesasne Mohawk Police Service, says eight bodies have now been found after an overturned boat was spotted in the water on Thursday afternoon.
He was later reported missing, leading to the search efforts that found the bodies. Oakes is a person of interest in the case, said Dulude.
Police located Oakes’s vessel near the bodies, Lee-Ann O’Brien, the deputy chief of police for the Akwesasne Mohawk police service, said on Friday morning. Akwesasne is about 120 kilometres west of Montreal.
The IDs of the victims have not yet been released, pending notification of their next of kin.
A storm brought high winds and sleet into the area on Wednesday night. “It was not a good time to be out on the water,” O’Brien said.
“It could have been anything that caused this tragedy,” he said. “It could have been a faulty boat, it could have been human error and that the investigation will determine.”
Kevin Sturge Lazore, captain of the Akwesasne Fire Department’s Station 3, sent 15 volunteer firefighters to search the river on Thursday after Oakes’s family reported him missing. Another dozen or so volunteers from other stations in the community joined the effort.
The firefighters recovered the boat, its hull dented on the bottom as if it had hit ice or a rock, Lazore said.
Akwesasne Mohawk police Chief Shawn Dulude says they have intercepted 80 attempted illegal crossings into the U.S. through their territory since January.
He and O’Brien said the boat was small, and wouldn’t have been able to safely carry seven or eight people.
“What that boat could handle and the amount of people in it, it doesn’t make a pretty picture,” Lazore said, standing by the fire department dock on the water.
Friday morning, the water was calm and mirror-like. “It can change in the blink of an eye,” Lazore said, noting waves were more than a metre high Wednesday night.
“The river is always the major concern…. Our elders tell us, always be careful, especially in the spring, with the runoff, the current is stronger and the water is freezing.”
Other attempted crossings
The volunteer firefighters were only searching for one person when they discovered the first six bodies.
“It’s hitting them now,” Lazore said, adding they had begun a debrief Thursday evening to process what they had seen, but were interrupted by a call for a structure fire.
Thursday wasn’t the first time Lazore’s team has been called on to search for missing people who have tried to cross the border.
He said they rescue people attempting to enter the U.S. or Canada over the river and its tributaries about three or four times a year.
“It gets hard. It wears the guys down.”
Almost exactly a year ago, they rescued a group of six Indian nationals who had just made it into the United States on the river when the boat they were in hit a shallow bank and got stuck.
They were able to stand up in the boat and were rescued by the volunteers and Akwesasne Police Department — which received $6.5 million from the Quebec government last year to help it deal with the increased flow of human smuggling in the area.
“They were lucky. It could have been a lot worse,” Lazore said.
Police continued the search for two people missing on Friday after the bodies of six people were recovered from the St. Lawrence River near Akwesasne, on the Ontario, Quebec and New York borders.
The fire station is next to a recreation centre where community members gathered Friday afternoon. They sit across a road from the Tsi’Snaihne River.
A police helicopter circled above.
Next to the fire station, a group of men lit a sacred fire early that morning and kept it going throughout the day. Lazore said the fire was to honour the families and Oakes.
Smuggling on the rise
O’Brien, the deputy police chief, said the community has seen an uptick in human smuggling into the U.S. There have been 48 incidents so far this year, she said.
But the recent deaths had nothing to do with the closure of the Roxham Road illegal border crossing, she added.
“That closure was people seeking refuge, leaving the U.S. to Canada. These people were believed to be gaining entry into the U.S. It’s completely the opposite.”
Most of those who try to enter the U.S. through the area are Indian and Romanian families, she said, but she said she “had no idea” why that was the case.
Ryan Brissette, a public affairs officer with U.S. Customs and Border Patrol, says the agency had seen a “massive uptick in encounters and apprehensions” at the border.
The agency saw more than eight times as many people try to cross from Canada into the U.S. in 2022 compared to previous years, he said. Many of them — more than 64,000 — came through Quebec or Ontario into New York.
“Comparing this area in the past, this is a significant number,” Brissette said.
“There’s a lot of different reasons as to why this is happening, why folks are coming all of a sudden through the northern border. I think a lot of them think it’s easier, an easy opportunity and they just don’t know the danger that it poses, especially in the winter months.”
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Canadians in some provinces and territories will soon be paying a little bit more at the gas station as a federal carbon price is set to go up starting Saturday.
The fuel charge is rising by 30 per cent from $50 per tonne of emissions to $65 on April 1. This will translate to an increase of roughly three cents per litre for gas, reaching a total of 14 cents per litre.
The scheduled increase will apply in Ontario, Manitoba, Saskatchewan, Alberta, Yukon and Nunavut.
Meanwhile, the carbon price jump will go into effect in Newfoundland and Labrador, Nova Scotia, and Prince Edward Island on July 1.
Canada began pricing carbon pollution in 2019.
The move is part of Ottawa’s commitment to tackle climate change with a goal to reach net-zero carbon emissions by 2050.
While Canadians will see an increase at the pumps, the carbon price increase is not expected to have a huge impact on their gas expenses, said Hadrian Mertins-Kirkwood, a senior researcher with the Canadian Centre for Policy Alternatives.
“It’s an incremental increase, but it’s not actually going to be a huge change year-over-year that people will notice ,” he told Global News.
For individuals, it could mean a $1 jump per tank depending on how big the vehicle is, Mertins-Kirkwood estimated. For businesses too, it’s “not a major expense,” he said.
Mertins-Kirkwood said things like oil market fluctuations and gas taxes have a much bigger impact on energy costs.
“Those swings are way bigger than the carbon price.”
What else is changing?
The carbon price increase comes amid some temporary relief for Canadians with lower gas prices reported in February after record-high costs last year. Gas prices in Canada surpassed $2 per litre for the first time ever last year.
On a monthly basis, Canadian drivers paid one per cent less for gas in February, Statistics Canada said in its latest report released on March 21. Overall, gas prices dropped by 4.7 per cent in February – which was the first yearly decline since Jan 2021, StatCan reported.
The agency said the year-over-year decline is partially attributed to the significant jump in prices seen in February 2022 amid Russia’s invasion of Ukraine.
The Canadian national average for gas prices stood at 150.8 cents per litre on Friday morning, according to GasBuddy. The CAA’s estimate for Friday was 149 cents per litre.
The carbon tax will not only raise gas prices, but could make its way into Canadian pocketbooks in other ways too.
For instance, aviation gasoline in the four provinces is also going up by roughly 3.5 cents a litre to a total of almost 16 cents per litre, which could potentially mean higher airfares down the line.
However, the rates for aviation gasoline and aviation turbo fuel will remain unchanged in the territories due to the “high reliance” on air transportation, the federal government says.
Light fuel oil, which is used in household equipment, is increasing to 17 cents per litre – an increment of nearly four cents.
Carbon pricing can have also ripple effects on food prices, other grocery items and shipped goods experts say, as Canada’s truck-based transportation industry will be spending more money to fill up the tank.
“It’s possible it could have an impact on things like shipping, but it’s a relatively minor impact,” said Mertins-Kirkwood.
Will rebates make a difference?
Ottawa has claimed that eight out of 10 Canadian families will get more money back than they pay under the federal carbon pricing plan because of the Climate Action Incentive.
Canadians can claim CAI payments by filing annual federal taxes.
Mertins-Kirkwood said most households, except those earning a high income, are “better off” from the carbon pricing due to the government rebate which recycles revenue back to families.
However, the Parliamentary Budget Officer (PBO), an independent watchdog, said in a report last year that a bulk of Canadian households over the long term will see a “net loss” from the federal carbon pricing by 2030-31.
The PBO said that Albertans in the top income quintile would pay the largest net cost from the carbon tax, while the lowest-income quintile households in Saskatchewan stand to see the largest net gain via the rebate.
— With files from Global News’ Craig Lord
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