‘People Are Going To Be Hurt,’ Warns Dalhouise Economist On Higher Interest Rates
HALIFAX — Given the Bank of Canada’s statements over the past year, you’d be forgiven for thinking the way to tackle the inflation crisis is to raise interest rates and create more economic hardship, especially for homeowners with variable mortgages.
But many Canadian economists have been vocal in their critiques of this measure to curb inflation. Long-time Dalhousie University economist Talan Iscan was sharp with his criticisms late last week. In a conversation with Huddle, the professor said the Bank of Canada can come across as uncaring to the working class when it explains its interest rate decisions.
“How does a public institution balance all the factors [causing inflation] and be transparent about it? Unfortunately, they have difficulty grappling with these issues. How many times have you heard them talking about middle class, lower classes, poor people… in their communities? How many times have we seen it? None that I’m aware of,” said Iscan.
“They try to steer away from these things but that’s not healthy. In the end, it comes across as they don’t care. I don’t know if they don’t care about the middle class. But, at the end of the day, there will be people who are going to be hurt, and these people are going to be hurt badly. What do we do about it as a society?”
Many Canadians are deeply concerned about their mortgage payments, after the Bank of Canada raised rates seven times since March. The latest rate hike came just last week. In 2022, base interest rates gave skyrocketed from 0.25 to 4.25 percent. People are now paying hundreds, in some cases thousands of dollars more per month on their mortgages.
On top of his concerns about the middle and lower classes being hurt financially by raising rates, Iscan also believes this strategy doesn’t deliver results quickly enough.
“The Bank of Canada, for more than two decades, said whatever they do will only start showing within a window of 18 and 24 months. That has been the narrative,” he said.
“People are living now. What can you do about it? And why did we get into this mess in the first place?”
‘The social contract we thought we had was completely broken’
The federal government also hasn’t stepped in with its own inflation policy or legislation. Iscan explains that it’s that way by design. For decades there has been a “division of labour” where the Bank of Canada handles inflation and the government is hands-off. Iscan believes it’s a relationship that isn’t working right now.
“This is the macroeconomic policy paradigm that we have been in over the last 20-25 years. The Bank of Canada takes care of the inflation and fiscal stuff. We have a division of labor. It’s convenient for both parties. But in times like this, it doesn’t work.”
Iscan points out that we are living in economic times that can be hard to forecast. He admits that he himself was wrong a year ago when he told Huddle inflation should drop in 2022. He believes we have underestimated just how much power corporations have gained through consolidation.
“Our mindset that was shaped by data over the last 20 years didn’t help us. We were completely blindsided by the rising inflation, myself included,” said Iscan. “I wasn’t expecting these corporations to jack up these prices and then brag about it. The social contract we thought we had was completely broken.”
“We gave corporations and companies a lot more power than we should have given them. Do you know how many grocery stores are making the calls in Halifax? The Bank of Canada doesn’t think in those terms.”
Iscan says one way to help those who are suffering financially is for governments to introduce windfall taxes on giant companies that have seen profits increase since the pandemic and benefitted from inflation. This has been done to the oil industry in Europe to a large extent.
Despite facing pressure from its political opposition and other advocacy groups, the Trudeau government has refused to introduce windfall taxes in the oil sector; or any sector.
Housing market crash coming?
The rise in interest rates is also causing a collapse in the Canadian housing market. Housing prices have been dropping since reaching historic highs last spring. A housing market crash is often the first sign of a recession, and it’s something economists say could very well happen in 2023.
But Iscan said he doesn’t care whether the economic numbers next year technically match the criteria for an official recession. He is more concerned about the inevitable: that people will struggle to pay for food and their homes, regardless of the term economists tag onto it.
“I really don’t care whether one single number goes above zero or below zero for two quarters in a row so that we call it technically a recession or not. What matters is what’s happening to humans who are not rich enough to [make it through] this thing.”
“If a lot of people are finding it impossible to put bread on the table because their mortgage payments went up by $1,000, do they care whether we call it a recession or not?”
Iscan notes that a long-term solution to inflation is for the country, and the world, to finally transition to renewable, affordable energy, and off of oil. A lot of inflation, especially with food, has come because of the skyrocketing cost of oil and gas.
“We need to transition to lower-cost, renewable energy, not only in the short term but in the long run. And I think the time is now that we can postpone this decision. I mean, a lot of this is happening because of the rising energy prices.”
“But we’ve got ourselves into a bad mess right now, internationally. We’ve really mishandled this thing. We really have to think about how are we going to live in peace, and how are we going to make this transition happen.”
Derek Montague is a Huddle reporter in Halifax. Send him your feedback and story ideas: [email protected].