The world’s central bank umbrella body, the Bank for International Settlements (BIS), called on Sunday for more interest rate hikes, warning the world economy was now at a crucial point as countries struggle to rein in inflation.
Despite the relentless rise in rates over the last 18 months, inflation in many top economies remains stubbornly high, while the jump in borrowing costs triggered the most serious banking collapses since the financial crisis 15 years ago.
“The global economy is at a critical juncture. Stern challenges must be addressed,” Agustin Carstens, BIS general manager, said in the organization’s annual report published on Sunday.
“The time to obsessively pursue short term growth is past. Monetary policy must now restore price stability. Fiscal policy must consolidate.”
Claudio Borio, the head of BIS’s monetary and economics unit, added there was a risk an “inflationary psychology” was now setting in, although the bigger-than-expected rate hikes in Britain and Norway last week showed central banks were pushing “to get the job done” in terms of tackling the problem.
Their challenges are unique by post-World War Two standards, though. It is the first time that, across much of the world, a surge in inflation has co-existed with widespread financial vulnerabilities.
The longer inflation remains elevated, the stronger and prolonged the required policy tightening, the BIS report said, warning that the possibility of further problems in the banking sector was now “material”.
If interest rates get to mid-1990s levels the overall debt service burden for top economies would, all else being equal, be the highest in history, Mr. Borio said.
“I think central banks will get inflation under control. That is their job – to restore price stability,” he told Reuters. “The question is what will the cost be.”
The Swiss-based BIS held its annual meeting in recent days, where top central bankers discussed the turbulent last few months.
March and April saw a failure of a number of U.S. regional banks including Silicon Valley Bank and then the emergency rescue of Credit Suisse in the BIS’s own backyard.
Historically, about 15 per cent of rate hike cycles trigger severe stress in the banking system, the BIS report showed, although the frequency rises considerably if interest rates are going up, inflation is surging or house prices have been rising sharply.
It can even be as high as 40 per cent if the private debt-to-GDP ratio is in the top quartile of the historical distribution at the time of the first rate hike.
“Very high debt levels, a remarkable global inflation surge, and the strong pandemic-era increase in house prices check all these boxes,” the BIS said.
It estimated too that the cost of supporting aging populations will grow by approximately 4 per cent and 5 per cent of GDP in advanced (AEs) and emerging market economies (EMEs) respectively over the next 20 years.
Absent belt-tightening by governments, that would push debt above 200 per cent and 150 per cent of GDP by 2050 in AEs and EMEs and could be even higher if economic growth rates wane.
Part of the report published already last week also laid out a “game changing” blueprint for an evolved financial system where central bank digital currencies and tokenized banking assets speed up and smarten up transactions and global trade.
Commenting further on the economic picture, Mr. Carstens, former head of Mexico’s central bank, said the emphasis was now on policymakers to act.
“Unrealistic expectations that have emerged since the Great Financial Crisis and COVID-19 pandemic about the degree and persistence of monetary and fiscal support need to be corrected,” he said.
The BIS thinks an economic “soft, or soft-ish” landing – where rates rise without triggering recessions or major banking crashes – is still possible, but accepts it is a difficult situation.
Analysts at Bank of America have calculated there have been a whopping 470 interest rate rises globally over the past 2 years compared with 1,202 cuts since the financial crash.
The U.S. Federal Reserve has lifted its rates 500 basis points from near zero, the European Central Bank has hiked the euro zone’s by 400 bps and many developing world economies have done far more.
The question remains what more will be needed, especially with signs that companies are taking the opportunity to boost profits and workers are now demanding higher wages to prevent a further erosion of their living standards.
“The easy gains have now been reaped and the last mile is going to be more difficult,” Mr. Borio said, referring to challenges central bankers now face reeling inflation back to safe levels. “I wouldn’t be surprised if there were more surprises.”
OTTAWA – Statistics Canada says wholesale sales, excluding petroleum, petroleum products, and other hydrocarbons and excluding oilseed and grain, rose 0.4 per cent to $82.7 billion in July.
The increase came as sales in the miscellaneous subsector gained three per cent to reach $10.5 billion in July, helped by strength in the agriculture supplies industry group, which rose 9.2 per cent.
The food, beverage and tobacco subsector added 1.7 per cent to total $15 billion in July.
The personal and household goods subsector fell 2.5 per cent to $12.1 billion.
In volume terms, overall wholesale sales rose 0.5 per cent in July.
Statistics Canada started including oilseed and grain as well as the petroleum and petroleum products subsector as part of wholesale trade last year, but is excluding the data from monthly analysis until there is enough historical data.
This report by The Canadian Press was first published Sept. 13, 2024.
VICTORIA – British Columbia is forecasting a record budget deficit and a rising debt of almost $129 billion less than two weeks before the start of a provincial election campaign where economic stability and future progress are expected to be major issues.
Finance Minister Katrine Conroy, who has announced her retirement and will not seek re-election in the Oct. 19 vote, said Tuesday her final budget update as minister predicts a deficit of $8.9 billion, up $1.1 billion from a forecast she made earlier this year.
Conroy said she acknowledges “challenges” facing B.C., including three consecutive deficit budgets, but expected improved economic growth where the province will start to “turn a corner.”
The $8.9 billion deficit forecast for 2024-2025 is followed by annual deficit projections of $6.7 billion and $6.1 billion in 2026-2027, Conroy said at a news conference outlining the government’s first quarterly financial update.
Conroy said lower corporate income tax and natural resource revenues and the increased cost of fighting wildfires have had some of the largest impacts on the budget.
“I want to acknowledge the economic uncertainties,” she said. “While global inflation is showing signs of easing and we’ve seen cuts to the Bank of Canada interest rates, we know that the challenges are not over.”
Conroy said wildfire response costs are expected to total $886 million this year, more than $650 million higher than originally forecast.
Corporate income tax revenue is forecast to be $638 million lower as a result of federal government updates and natural resource revenues are down $299 million due to lower prices for natural gas, lumber and electricity, she said.
Debt-servicing costs are also forecast to be $344 million higher due to the larger debt balance, the current interest rate and accelerated borrowing to ensure services and capital projects are maintained through the province’s election period, said Conroy.
B.C.’s economic growth is expected to strengthen over the next three years, but the timing of a return to a balanced budget will fall to another minister, said Conroy, who was addressing what likely would be her last news conference as Minister of Finance.
The election is expected to be called on Sept. 21, with the vote set for Oct. 19.
“While we are a strong province, people are facing challenges,” she said. “We have never shied away from taking those challenges head on, because we want to keep British Columbians secure and help them build good lives now and for the long term. With the investments we’re making and the actions we’re taking to support people and build a stronger economy, we’ve started to turn a corner.”
Premier David Eby said before the fiscal forecast was released Tuesday that the New Democrat government remains committed to providing services and supports for people in British Columbia and cuts are not on his agenda.
Eby said people have been hurt by high interest costs and the province is facing budget pressures connected to low resource prices, high wildfire costs and struggling global economies.
The premier said that now is not the time to reduce supports and services for people.
Last month’s year-end report for the 2023-2024 budget saw the province post a budget deficit of $5.035 billion, down from the previous forecast of $5.9 billion.
Eby said he expects government financial priorities to become a major issue during the upcoming election, with the NDP pledging to continue to fund services and the B.C. Conservatives looking to make cuts.
This report by The Canadian Press was first published Sept. 10, 2024.
Note to readers: This is a corrected story. A previous version said the debt would be going up to more than $129 billion. In fact, it will be almost $129 billion.
NANAIMO, B.C. – Former Bank of Canada governor Mark Carney says he’ll be advising the Liberal party to flip some the challenges posed by an increasingly divided and dangerous world into an economic opportunity for Canada.
But he won’t say what his specific advice will be on economic issues that are politically divisive in Canada, like the carbon tax.
He presented his vision for the Liberals’ economic policy at the party’s caucus retreat in Nanaimo, B.C. today, after he agreed to help the party prepare for the next election as chair of a Liberal task force on economic growth.
Carney has been touted as a possible leadership contender to replace Justin Trudeau, who has said he has tried to coax Carney into politics for years.
Carney says if the prime minister asks him to do something he will do it to the best of his ability, but won’t elaborate on whether the new adviser role could lead to him adding his name to a ballot in the next election.
Finance Minister Chrystia Freeland says she has been taking advice from Carney for years, and that his new position won’t infringe on her role.
This report by The Canadian Press was first published Sept. 10, 2024.
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