Canadians need to look at higher interest rates as they too will fall

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Ex Bank of Canada Governor David Dodge he says the central bank has a year to 18 months to get inflation under control or risk a return to the “pretty awful era” of the mid-1970s to the mid-1980s, characterized by a lack of price predictability and social upheaval.

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“Hopefully, with just this somewhat modest, historically speaking, increase in interest rates of six percent or so, that will be enough to bring demand back more or less in line with supply, and we’ll be back into the period very quickly.” where people expect prices to be stable again,” said Dodge, one of the authors of an a comprehensive report on the economic outlook published on June 12 by law firm Bennett Jones LLP.

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“We’re going to lose it if we don’t put up enough yards in the next year or 18 months. And … that’s a big waste of a big chunk of social capital.”

What drives inflation

Curbing inflation in the near term will mean giving up some consumption, which will be difficult for some segments of society but necessary, said Dodge, an economist and longtime federal bureaucrat who held senior positions including deputy treasury secretary before becoming central bank governor in in 2001.

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He said that The Bank of Canada has taken the right steps in the short term, but he believes global economies are in the midst of a major shake-up, with fragmented trade making it harder to keep costs down and an increasingly digital world leading to clear winners and losers.

“(We’re) going into this very, very difficult period where we have to do changes to adapt to climate change and a difficult period where we will have technological changes that will change some relative wages,” he said.

“(If) we are reasonably sure as a society that we know what ground we are walking on, that prices are more or less average, that they will be pretty much stable … we won’t have the terrible battles that we’ve had between different groups to get wages profits or to increase the big prices we had during the 70s.

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As long as inflation is fallingDodge said companies and consumers should look “beyond” the higher-than-usual interest rates needed to get to the point where they, too, fall.

He compared it to the early 1980s, when Canadians were paying up to 18 percent mortgage interest.

“None of this is easy, but it is doable. It is important that we all really understand – households, businesses and governments – that this is a process we are going through. We’ll work it out.”

The Bank of Canada’s interest rate hikes over the past year or so have been dramatic after a long period of historically low rates, putting stress on those with mortgage debt and business loans and casting a shadow over some subsectors of commercial real estate. Banks took more provisions for loan losses and inflation rose for the first time in nearly a year in May as house prices and rents rose.

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Canada is lagging behind the world

Dodge, 80, urged Canadian policymakers to set the table for digitization that prepares companies for global competitiveness and to take steps to increase domestic competition in highly concentrated sectors. such as banking and grocery increase investment and productivity and keep prices low.

The price stability that characterized the first 20 years of this century was a key element in keeping the economy running smoothly, and that predictability reduced social friction, he said.

“Some of these (prices) have gone up, some have gone down, but basically your perception has been more or less stable. And so when you went to your employer or when your employers looked at it, we kind of had an idea of ​​what was reasonable year-over-year nominal wage growth,” he said. “We didn’t have big fights and big problems in that regard.”

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The competition is tremendous, tremendous effort… to improve

David Dodge

In order for Canada to better cope with changes in the global economy and keep the country on the path to economic growth, Dodge said the federal government must tackle long-overdue overhauls of frameworks including taxes and competition. He said Ottawa has not moved fast enough on a decade-old commitment to create systems for an increasingly digitized worldwith countries including India and Brazil now well ahead of Canada.

“We have a system that allows anti-competitive behavior in the financial area because we don’t have a good open data management system,” he said. “It’s a systemic problem that that data can’t be moved appropriately and securely…. (I’m) not blaming the banks, it’s blaming the fact that we haven’t moved forward to figure out a way to manage this data so that competition can actually take place.”

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In Brazil, the creation of a data management system that allows individual players performing various functions in the financial world to transact has been driven by the central bank, said Dodge, who was governor of the Bank of Canada from 2001 to early 2008. In India, the government is behind the use of such data .

While Canada is dealing with some aspects of this transition, such as whether the Bank of Canada should oversee a digital currencyDodge said North America is “well behind the world” while Canada “is firmly behind.”

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For example, the ongoing revision of the payment system will be suitable for third generation (3G) technology when the world moves to 5G.

“That’s a way to frame where we are in the game,” Dodge said, adding that a federal Treasury secretary would be the logical leader of the effort, given that banking falls under federal jurisdiction and the industry is dominated by a handful of big players. it is unlikely to act independently.

“Unless our firms are truly facing competitive pressures, they will not make the additional investment that is necessary,” he said. “I mean the competition is tremendous, a tremendous effort, if you will, to improve.

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