B.C. Premier David Eby said he was “relieved” to see the Bank of Canada hold the key interest rate at five per cent last week, following his controversial Aug. 31 letter to the bank that “urged” its governor Tiff Macklem to not increase it.
Eby was the first Canadian premier to officially weigh in on the bank’s otherwise politically independent policy deliberations; he was followed by Ontario Premier Doug Ford, who expressed similar concerns about high, and potentially rising, rates. Likewise, Finance Minister Chrystia Freeland has been criticized for opining on the bank’s deliberation that resulted in the rate pause on Sep. 6.
Eby told Bank of Canada another interest rate hike would be 'disturbing' to British Columbians
In an interview with Glacier Media on Sep. 8, Eby doubled down on his letter, which largely expressed concern for homeowners’ mortgage costs and speculation the construction industry will delay rental housing projects, further exacerbating rental costs.
“It was just very obvious to me — and I’m glad that it was obvious to the governor as well — that people are hurting out there. A lot of businesses are struggling with debt that they took on during the pandemic. A lot of people with lines of credit; with variable rate mortgages; with car payments, are really struggling out there,” said Eby.
"It needs to be on the radar as he (Macklem) makes those decisions," said Eby.
Eby told Macklem he found it “disturbing” the bank was considering another rate hike, while leaning on CIBC spokesperson and economist Benjamin Tal’s opinion that no more hikes are needed.
“In your role as governor,” Eby told Macklem, “I urge you to consider the full human impact of rate increases and not further increase rates at this time.”
Eby, as some economists do, argue the hikes (from 0.25 per cent in January 2022) need to work their way through the economy — that is to say, higher interest rates reduce aggregate demand, or less spending, in the economy, thus driving price gains (and thus inflation) downward, which is the goal of the bank’s monetary policy that targets a two per cent inflation rate. And so, more people renewing their typical five-year mortgages at much higher rates means less money for them to spend on goods and services (in turn putting financial pressure on businesses).
Politicians need 'to remain careful' in 'grey area,' says professor
Eby’s letter to Macklem raised questions and criticisms on several fronts, including from economist Rob Gillezeau, a former senior aide to the B.C. Minister of Finance and Deputy Premier of B.C. from 2017 to 2019.
Now at the University of Toronto as an assistant professor of economics, Gillezeau has taken the politicians to task for potentially exerting political pressure on Macklem.
Gillezeau points out Eby implored Macklem to hold rates, regardless of the economic circumstances the bank is observing. This poses a risk of sustained or increased inflation, he told Glacier Media.
“Inflation is grounded in the real economy, but it's also grounded in people's expectations. If people perceive the bank to be under political pressure, it can create the expectation that the bank is not tackling inflation. And expectations for inflation transform into actual inflation,” Gillezeau asserted.
Gillezeau said the most concerning commentary has come from Freeland, as her office technically has direct power over the bank’s mandate. Freeland wrote to Macklem calling the rate pause "welcome relief."
However, Gillezeau notes comments from Eby and Ford, who also asked for an outright halt to further hikes, may cause indirect political pressure on Freeland (Eby’s federal NDP colleagues echoed Eby’s letter in their own letter to Freeland this month).
University of B.C. political science professor Stewart Prest said Eby ventured into a “grey area” where the bank needs to remain independent of partisan politics; however, there is also a need for politicians to communicate with the bank on what they are hearing about financial pressures in society, he said.
“Where we become more concerned is when it seems like the bank is, in some sense, bowing to political pressure and then making decisions that are politically expedient as opposed to meeting the bank's mandate of price stability.”
Prest said it’s been decades since the bank’s mandate, or monetary policy, has been called out by politicians.
“We do want politicians to remain careful of not going too far down the line of criticizing the bank,” said Prest, who echoed Gillezeau’s concerns about pressures on and from the federal finance minister.
“Where we really start to get concerned is when we see somebody at the cabinet level, and the federal government, particularly the senior cabinet official, or even the prime minister, start to call for the bank to take a particular direction,” said Prest.
Gillezeau said in the face of political pressure, Macklem “showed a great deal of grace that the bank is independent.”
Macklem, said Gillezeau, “effectively didn’t respond to the pushes from any of the premiers or from the finance minister, which frankly was the most inappropriate letter that went out the door.”
“The Bank of Canada is set up to be operationally independent. That independence is more important when the decisions are difficult. The decisions are difficult,” said Macklem on Sep. 7.
Economist counters narrative that rate hikes are causing inflation
A second criticism Eby has faced is the content of his letter, some of which Gillezeau labels as “misinformation.” The chief concern is that Eby asserted that higher mortgage payments are “directly causing further inflation.”
Bank of Nova Scotia economist Derek Holt issued statements last week to denounce such an assertion.
Indeed, Macklem addressed the fact that mortgage costs are the leading cause of inflation: “The single price increase that is having the biggest impact on CPI (Consumer Price Index) inflation is mortgage interest costs, which have gone up as we’ve increased interest rates. They’re about 30 per cent higher than they were a year ago. When you exclude mortgage interest costs, CPI inflation is close to 2.5 per cent — which has led some to argue that inflation is effectively back at target.”
However, Macklem went on: “It’s true that if we hadn’t raised interest rates, mortgage costs might be lower today, but inflation throughout the economy would be a much bigger problem for everyone.”
Macklem noted that without outliers, such as mortgage costs and gas prices (which very well could rise again due to global factors), core inflation inflation is still about 3.5 per cent and the bank and many economists see it jumping to four per cent this winter.
Macklem did not rule out another rate hike in October and the bank’s forecasting higher rates for a longer period. Therefore, it stands to reason if Macklem were to pause rates at the impetus of the politicians, there runs a greater risk inflation could rebound even more aggressively.
“Inflation is still raging. Wage pressures remain pointed higher. Alongside such deep-seated challenges to the country’s outlook, we do not need governments adding central bank meddling to the list,” said Holt, who, per Reuters, led public critique against Freeland calling the rate pause "welcome relief."
If inflation rebounds, it is low-income people who hurt the most, according to economic consensus, such as that noted by the U.S. Federal Reserve. The reserve notes mortgage holders are more well-positioned to find savings, say by buying non-branded food or eating out less whereas poor people facing inflation cannot cut anything further; In B.C., there are more reports of homelessness and longer lines at food banks due to inflation.
“There is no pain-free way to tackle inflation,” said Gillezeau.
Eby speaking for homeowner class
Eby’s letter did not implore the bank to tackle inflation at any cost; Prest says this can raise the question of who Eby is speaking for.
Prest said it’s clear to him Eby is speaking to the middle class and class of asset holders who have, indeed, been most impacted by the very rate hikes that have dampened inflation.
“It is also very clear that he's trying to speak the language of homeowners here. That is emblematic of a party that sees itself as centre-left but a heavy impairment on the centre,” Prest told Glacier Media.
Public asset disclosures show Eby and his NDP MLAs fit into that mould and then some, based on their home ownership rates: 93 per cent of MLAs own a home and nearly half own a second property.
“It’s a fair question to ask,” said Prest in response to Glacier Media's question about whether the political class can adequately address the province's housing affordability crisis.
Eby had recently identified as a renter to exemplify his understanding of renter issues; however, he shed that distinction in March 2022 with the purchase of a $2.2-million townhome, near the University of B.C.
Eby said his letter is not influenced by his nor his party’s collective investment in B.C. real estate; Prest, meanwhile, said the premier's motivations do appear more geared toward the homeowner voting block.
Eby’s letter also states his concern that, based on anecdotal information from developers, new rental projects are being “shelved” because of higher rates (financing costs).
And so, by Eby’s logic, rates need to be paused or come down to bring more supply to market and alleviate ongoing rental cost increases.
“You can’t rent a rental unit that doesn't exist. So then you're competing in a smaller pool of rental units, which is driving up the cost,” said Eby.
Building permits down from 2022, but up from 2019: StatCan
According to Statistics Canada, new residential building permits in B.C. for the first seven months of 2023 were valued at $9.1 billion. In the same period in 2022 (a record year for construction following pandemic delays), they were valued at $10.6 billion. In 2019, new permits were valued at $7.5 billion.
In the first seven months of 2023, 28,373 new housing units were issued permits, whereas in the same period in 2022, 31,121 new homes were permitted. In 2019, 27,531 new units were permitted.
Some economists do agree, however, that rates are too high, including those who fall into the so-called left wing of the political spectrum, such as at the Canadian Centre for Policy Alternatives of BC (CCPABC).
However, the CCPABC also argues that in order to counter inflation, the B.C. government needs to tax properties more, provide more government subsidies to low-income people and significantly increase spending on taxpayer-subsidized affordable housing — aspects Eby does state he’s doing in his letter, although not at a pace great enough to counter inflation, according to CCPABC.
Eby also told Prime Minister Justin Trudeau on Aug. 31 that senior governments can and must play a role in curbing inflation namely by improving the movement of goods and people. As such, Eby called on Trudeau to increase spending on infrastructure.
"We need the accompanying infrastructure — roads, rail, clean electricity transmission, and shipping ports — to keep the economy, people and goods moving," wrote Eby.
Gillezeau said no Canadian government appears to have gotten the memo on taming inflation on the fiscal (not monetary policy set by the Bank of Canada) side of policy.
“Either you have very large reductions in spending, or you have very large tax increases. You can do those but no one has seriously put those alternatives on the table,” said Gillezeau.
“If you're going to deal with inflation, it's gonna be tough. And if you don't make the tough decisions, be it rate hikes or be it on the fiscal side, you're not going to contain inflation.”
B.C. Leader of the Opposition Kevin Falcon told Glacier Media, via email, that Eby's letter to the bank was "an empty gesture."
"It was complete hypocrisy for David Eby to plead with the Bank of Canada to not raise interest rates while his government fuels inflation and does nothing to make life more affordable for British Columbians in areas where he does have influence, such as provincial policies, taxes, and his reckless spending decisions," stated Falcon.