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More interest rate hikes are needed to tame inflation, Bank of Canada governor says

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Signs that global inflation pressures are easing are not enough to curb future interest rate hikes as the national economy is still running too hot, the Bank of Canada’s top policymaker says.

Tiff Macklem said in a speech Thursday to the Halifax Chamber of Commerce that even as inflationary pressures beyond Canada’s border such as high global shipping rates and supply chain concerns subside, domestic sources of price growth such as demand for services remain too hot.

The annual rate of inflation clocked in at 7.0 per cent in August as gasoline costs continued to fall, per Statistics Canada, though prices on food continued to surge, hitting a 41-year high.

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Macklem also said surging demand for travel and recreation after the end of COVID-19 restrictions fuelled inflation.

Those forces have helped keep the Bank of Canada’s core metrics of inflation hot even as the headline figure from Statistics Canada has slowed in two consecutive months.

“When combined with still-elevated near-term inflation expectations, the clear implication is that further interest rate increases are warranted. Simply put, there is more to be done,” Macklem said Thursday.

The Bank of Canada, as an institution, and Macklem specifically have been targets in recent months for federal Conservative leader Pierre Poilievre, who charges the central bank with enabling the Liberal government agenda and contributing to rampant inflation.

During his leadership campaign, Poilievre said he would fire Macklem from his post if he became prime minister, a proposal that has received backlash in turn as not respecting the independence of the institution.

Global National anchor Dawna Friesen asked Macklem in an interview following his speech on Thursday about his response to the Conservative leader.

The governor told Friesen that the central bank’s independence is the reason it’s able to “deliver price stability” and control inflation — a task he was resolute in his comments Thursday the Bank of Canada would be able to accomplish.

“I can tell you, I go to work every day, that’s my focus. Inflation is hurting Canadians. The best way to protect Canadians from high inflation is to eliminate it.”

 

How high will interest rates go?

The Bank of Canada’s policy rate currently sits at 3.25 per cent, following an increase of 0.75 percentage points on Sept. 7.

The central bank’s benchmark rate has jumped up three percentage points across five consecutive hikes since March, which Macklem acknowledged Thursday is “one of the steepest and fastest tightening cycles we’ve ever conducted.”

CIBC chief economist Avery Shenfeld said in a note to clients Thursday that Macklem’s speech “had a fairly hawkish tilt,” implying a more aggressive stance on monetary policy.

The central bank had signalled back in September that more interest rate hikes would be needed to tame inflation. But Shenfeld said Macklem’s remarks meant the next rate decision on Oct. 26 was “still a lock” for an increase of half a percentage point with a pause afterwards unlikely.

Warren Lovely and Taylor Schleich of National Bank Financial (NBF) said in a note that they also expect a move greater than the standard 25-basis-point step later this month, with the policy rate ending the year “at no less than” four per cent.

The NBF economists said that Macklem’s tone was reminiscent of recent speeches from U.S. Federal Reserve chair Jerome Powell, who has promised more “pain” to come in efforts to tame inflation south of the border.

Indeed, Macklem was adamant that as the labour market remains tight and wages are beginning to grow, Canada’s economic growth must slow to give supply time to catch up with pent-up consumer demand.

“This will help relieve price pressures here in Canada,” he said.

 

Weak Canadian dollar fuelling inflation

Asked whether he still believed Canada will skirt a recession, Macklem maintained it is possible to avoid the economic downturn but conceded there are many factors that could complicate those efforts.

Global supply chain issues persist with pandemic-related lockdowns in China, war continues in Europe and inflation could prove “sticky” at home, he cited as ongoing issues the bank is monitoring.

“There is a path to a soft landing but it is a narrow path and there are risks,” he said.

“How high interest rates need to go … really depends on how inflation and the economy responds.”

One such inflationary pressure is the relative weakness of the Canadian dollar to the U.S. greenback.

Usually when a country’s central bank raises interest rates, the national currency gets a boost as investors are incentivized to hold that denomination.

But the Canadian loonie — like most currencies around the world, in fact — has faltered as of late due to the overwhelming strength of the U.S. dollar. The Canadian dollar is at a more-than two-year low of 73 cents to the U.S. dollar as of Thursday.

That’s driving up the prices of imports from the U.S. and weakening the purchase power of Canadians who travel south for the winter, contributing to inflation.

Macklem said Thursday that the lagging loonie means “there’s going to be more to do on interest rates.”

 

Weighing the wage question

In his speech Thursday, Macklem continued to try to set expectations for inflation in the near- and long-term, pledging the central bank would fulfill its mandate to bring price growth back to its two-per-cent target.

Speaking from Halifax, he alluded to the rebuilding efforts underway following the devastation from storm Fiona as providing resolve for the Bank of Canada’s own campaign.

“Atlantic Canadians will rebuild after this storm as they always have. And the Bank of Canada will control inflation as it has for the last 30 years. We are resolute in our commitment to restore price stability for all Canadians,” he said.

Inflation expectations are a critical part of the fight against inflation itself. When consumer and employer expectations for inflation become “unanchored,” they begin demanding higher wages to offset the impact, which then feeds back into prices themselves as businesses pass on costs to the end-user.

The “wage-price spiral” is a worst-case scenario for the Bank of Canada, Macklem explained, and would require much higher interest rates to tame.

“Once you get into a wage-price spiral, it’s too late,” he said.

But as Macklem has preached this to business leaders and warned them against raising wages too high amid the inflation fight, some have accused the central bank governor of overstepping his bounds and disrupting collective bargaining.

When the governor spoke to the Canadian Federation of Independent Business (CFIB) in July, he warned attendees not to bake today’s inflation levels into long-term wage contracts.

The Canadian Labour Congress has taken issue with this tact — president Bea Bruske said in a statement last month that she’s “deeply concerned about the Bank’s preoccupation with encouraging companies to push down wages, at a time when so many workers struggle to make ends meet.”

Macklem was asked about his wage messaging on Thursday. He maintained that he is leaving decisions about payroll up to businesses, and to workers to decide what wages they are willing to accept.

But he said his guidance has been to not bake high levels of inflation into long-term discussions about salary.

“What I’ve been telling workers, what I’ve been telling businesses, is as you take your decisions, don’t count on inflation staying where it is,” he said.

“Inflation is coming down, and workers and businesses can count on that.”

— with files from Reuters

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CIBC profit falls 18% on higher costs, loan-loss provisions; hikes dividend – The Globe and Mail

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Canadian Imperial Bank of Commerce CM-T reported an 18-per-cent drop in fiscal fourth-quarter profit and raised its dividend as the bank was hit by higher expenses and loan loss provisions.

The Toronto-based bank is the fourth major lender to report earnings for the quarter that ended Oct. 31, and the second to fall short of analysts’ profits estimate, along with National Bank of Canada. Royal Bank of Canada and Bank of Nova Scotia both reported earnings that were ahead of expectations.

CIBC earned $1.19-billion, or $1.26 per share, in the fourth quarter. That compared with $1.44-billion, or $1.54 per share, a year earlier.

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The bank’s results included several special charges, including a $91-million increase in legal provisions, a $37-million charge from consolidating its real estate portfolio, and $12-million of costs related to the bank’s acquisition of the credit card portfolio of retailer Costco in Canada.

Adjusted to exclude those items, CIBC said it earned $1.39 per share. That was far shy of analysts’ estimate of $1.72 per share, according to Refinitiv.

CIBC raised its quarterly dividend by two cents to 85 cents per share.

For the full fiscal year, CIBC’s profit fell 3 per cent to $6.2-billion.

In the fourth quarter, CIBC took $436-million of provisions for credit losses – the money banks set aside in case loans go bad. That was a significant increase from a year earlier, with $305-million of that total attributed to the bank’s personal and small business banking operations in Canada.

Some of the increase in provisions came from changes to the bank’s economic forecasts, which are more pessimistic. But CIBC also said it had higher write-offs and impaired balances in its retail portfolio.

Profit from Canadian personal and small business banking fell 21 per cent year over year to $471-million. Higher costs were a major factor, including expenses related to the Costco card portfolio acquisition, as well as higher employee compensation. Loan and deposit balances were up 10 per cent, but profit margins on loans fell five basis points from the previous quarter. (100 basis points equal one percentage point).

“CIBC had a big miss in the quarter and, while some of it related to higher provisions on performing loans, the bank’s domestic net interest margin contraction was disappointing,” said John Aiken, an analyst at Barclays Capital Inc., in a note to clients.

In the bank’s U.S. commercial banking and wealth management division, profit fell 37 per cent from a year ago, mainly driven by higher provisions for loan losses. Impaired loan balances were higher in the real estate and construction sector, as well as in oil and gas.

Profit from Canadian commercial banking and wealth was up modestly to $469-million, and capital markets profit was relatively unchanged year over year at $378-million.

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DoorDash laying off 1,250 people, about 6% of its workforce – CBC News

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DoorDash Inc. said on Wednesday it was cutting about 1,250 jobs, or six per cent of its total workforce, as the food-delivery company looks to keep a lid on costs to cope with a slowdown in demand.

DoorDash went on a hiring spree to cater to a flood of orders from people stuck at home during the height of the pandemic, but a sudden drop in demand from inflation-wary customers has left the company grappling with ballooning costs.

“We were not as rigorous as we should have been in managing our team growth … That’s on me. As a result, operating expenses grew quickly,” chief executive Tony Xu said in a memo to employees that was posted on the company’s website.

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“Given how quickly we hired, our operating expenses — if left unabated — would continue to outgrow our revenue.”

DoorDash has about 20,000 employees worldwide, and “some of the affected employees are based in Canada,” the company told CBC News in a statement, without elaborating.

The company joins a growing list of technology firms, including Amazon, Facebook-owner Meta, Twitter, Shopify and others that have laid off thousands of employees in recent weeks as they brace for a potential economic downturn.

British food delivery company Deliveroo said in late October that sales growth would be at the lower end of its previous forecast. In September, Winnipeg-based food delivery app SkipTheDishes laid off 350 workers.

Earlier this month, DoorDash reported a bigger-than-expected quarterly net loss of $295 million US, raising questions about the growth prospect of delivery firms as economies reopen. The company’s shares have lost two thirds of their value this year.

“Greater emphasis on its cost structure is a welcoming sign, especially given the potential for consumer spending to deteriorate faster than expected,” said Angelo Zino, analyst at CFRA Research.

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'I didn't ever try to commit fraud on anyone,' FTX founder Sam Bankman-Fried says – CBC News

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The man at the centre of collapsed cryptocurrency exchange FTX made his first public appearance since the saga began, telling a New York audience on Wednesday that it was never his intention to commit fraud.

Sam Bankman-Fried, the 30-year-old founder of FTX, appeared at the New York Times’ Dealbook Summit on Wednesday, for an interview with journalist Andrew Ross Sorkin about what happened to cause his cryptocurrency firm to collapse into bankruptcy earlier this month.

The firm, once worth more than $32 billion US, entered bankruptcy protection on Nov. 11 after a whirlwind series of days that saw it go from trying to solve a liquidity crunch by merging with a rival, to having that deal fall apart and succumbing to a run on the bank as traders pulled out $6 billion in funds within three days.

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Filings show the company owes almost $10 billion to various creditors, and at least $1 billion worth of customer deposits are missing. 

Among numerous allegations, customer deposits at FTX appear to have been used as capital and collateral for loans for an investment firm called Alameda affiliated with him — an allegation that amounts to fraud, and one that he pushed back against strongly.

‘Deeply sorry’ 

“I didn’t ever try to commit fraud on anyone,” he told Sorkin, “I didn’t knowingly co-mingle funds.”

While he acknowledged mistakes were made, Bankman-Fried rejected repeated attempts to characterize what happened at his cryptocurrency firm as being in any way malicious or illegal.

“I am deeply sorry about what happened,” he said. “I was excited about the prospects of FTX a month ago, I saw it as a thriving, growing business.”

Bankman-Fried has seen his personal net worth evaporate in the debacle, from more than $26 billion a year ago to “close to nothing” today — and he insisted that he doesn’t have any of the money that has vanished.

“I don’t have any hidden funds here. Everything I have, I am disclosing,” he said. 

“I’m down to one working credit card … [and] hundreds of dollars or something like that, in a bank account.”

WATCH | Former regulator weighs in on FTX debacle: 

Former regulatory executive weighs in on FTX collapse

19 days ago

Duration 4:04

Charley Cooper, a former executive at commodities regulator the CFTC, says the collapse of FTX is a good lesson of the inherent dangers of the cryptocurrency space.

He says, to his knowledge, there are enough funds at FTX to give users their money. But his hands are tied since he no longer has a formal role at the company since it entered bankruptcy proceedings.

“I believe that withdrawals could be opened up today and everyone could be made whole,” he said.

John Jay Ray III, the restructuring expert who has been handling FTX’s bankruptcy proceedings has said in legal filings that Bankman-Fried appears to have treated the company as his “personal fiefdom” and has called the fiasco a “complete failure of corporate controls.”

Bankman-Fried has been active on Twitter since the debacle first started, but his appearance on Wednesday marks his first public appearance since the saga began.

There was speculation he was going to appear in person, but ultimately he appeared via video link from the Bahamas, where he lives.

Legal problems

Sorkin asked Bankman-Fried if he did not appear in person because he is worried about being within the reach of U.S. agencies including the Department of Justice and the Securities and Exchange Commission, both of which are probing what happened at FTX.

Bankman-Fried appeared to side-step that question, remarking instead that, to his knowledge, he can still legally enter the U.S. 

“I’ve seen a lot of the hearings that have been happening [and] would not be surprised if some time I am out there talking about what happened,” he said, adding that he “does not personally think” he has any criminal liability to worry about.

That being said, he said his legal team is “very much not” supportive of his decision to appear at the summit and speak publicly about what happened at FTX. His lawyers advice was “to recede into a hole,” he joked.

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