*Updated* Ongoing Bank of Canada Benchmark Rate Announcements

[Firebot]

Originally Posted by Slava

Oh I get it, it's super fun to pile on the central banks. So, how long is transitory? I mean we didn't have much of an inflationary problem until a year ago (and that's really being quite generous with the data). Inflation is dropping now, which is fairly evident. So, we're at the one year mark if we take a few liberties. Seems pretty transitory?

The war is hardly a cheap excuse though. Have a look at the price chart for oil for 2022 and to the surprise of no one (well perhaps you?), the price rockets up as Russia invades because of supply fears.

You realize that if central banks make major interest rates hikes specifically in order to combat inflation by forcing a recession, inflation isn't exactly running a natural or 'transitory' course...right?

What an insanely stupid argument.

[Slava]

Originally Posted by Firebot

You realize that if central banks make major interest rates hikes specifically in order to combat inflation by forcing a recession, inflation isn't exactly running a natural or 'transitory' course...right?

What an insanely stupid argument.

Haha, again, how long is transitory? We can either have a discussion or you can just say that my argument is stupid.

And yes, inflation can be transitory and they could take action to make it transitory. Where does it say that you can't have both?

[opendoor]

Originally Posted by Firebot

You realize that if central banks make major interest rates hikes specifically in order to combat inflation by forcing a recession, inflation isn't exactly running a natural or 'transitory' course...right?

What an insanely stupid argument.

The rate hikes are unlikely to have had any real impact on inflation yet, but inflation already looks to be moderating. Canada's inflation over the last 3 months has been a little over 2% annualized, despite the fact that none of the last 3 rate hikes would have had any tangible influence on that.

In the counterfactual where the Bank of Canada didn't raise rates as aggressively, there's a good chance that inflation would be tamed regardless. But they don't want to take that risk because a recession is far less damaging than prolonged runaway inflation.

[Firebot]

Originally Posted by opendoor

Unprecedented? Maybe if your memory only goes back 5 years. In the last 2.5 years Canada's M2 has increased by about 28%, for an annualized rate of just over 10%. Compare that to prior periods:

You are deliberately comparing a short year time M2 growth window while counting 2022 to a 10 year window average and honestly don't see a problem with this?

https://www.ceicdata.com/en/indicator/canada/m2-growth

M2 clearly spikes significantly in 2020-21 comparatively to other time periods, last time period being early 1980.

And counting 2022 in your percentage calculation is dishonest as we are in a quantitative tightening phase and in the process of overcorrecting for past mistakes. We are removing money from the market trying to correct the mistakes of the past year and a half. Remove 2022 and do a year to year comparison, pick 2020 or 2021 and do an apple to apple comparison.

https://tradingeconomics.com/canada/money-supply-m2

If you succeed in arguing on a technicality and that money printing is precedented from 40 years ago in a high inflation / high interest rate environment, it doesn't change our predicament, as central banks back in the day had policies with high interest rates and inflation in mind, and did not peg our policies to a 2% inflation CPI. Not sure the point of arguing on semantics just to prove the term unprecedented wrong when our economic ecosystem today is quite different then 40 years ago.

[opendoor]

Originally Posted by Fuzz

It's easy to go throwing all the blame at the BoC, but that doesn't really explain why so many of our peers are experiencing similar levels of inflation, so it rings a bit hollow to me. Did they all make the same mistakes, or was it unavoidable?

Mostly unavoidable. Central banks responded to a significant crisis by ensuring liquidity, which in Canada's case meant buying up government bonds. This led to more liquid money floating around (primarily in the form of supports for businesses and people) and also a drop in interest rates, as more demand for bonds drives the yield downwards. That can lead to inflation over time, particularly when there's extra money being introduced during a period of low productivity, but not always. 2007-2009 saw similar growth in monetary aggregates with no real inflation. But the alternative (widespread bankruptcies, exceptionally high job losses, etc.) was much worse, so it was really the best of several bad options (particularly given that no one could predict the future at that point in time).

The funny thing is, no one who is criticizing the central banks seems to be suggesting a viable alternative solution. Don't increase the money supply? Then we likely have a liquidity crisis and significant economic harm. Raise interest rates sooner? Yeah, that might have helped, but raising rates is what they're complaining about. Begin quantitative tightening sooner? That's going to increase rates and reduce economic growth, which again is what people seem to be complaining about.

[Ironhorse]

Originally Posted by opendoor

For the others, it mainly comes down to energy. Most of France's electricity and a good portion of their heat (at least until half their nuclear fleet went offline) was domestically produced and not subject to rising gas prices. Whereas the Netherlands is almost totally reliant on fossil fuels for energy.

Netherlands are in a worse position due to problems of their own making. They have decided to totally stop producing natural gas themselves (half the country sits on top of a huge gas field, discovered and produced since the late 50’s) due to fracking and earthquake concerns. So they are now becoming totally reliant on import fossil fuels, which as we know with the Russian situation is now quite volatile.

[Firebot]

Originally Posted by opendoor

The rate hikes are unlikely to have had any real impact on inflation yet, but inflation already looks to be moderating. Canada's inflation over the last 3 months has been a little over 2% annualized, despite the fact that none of the last 3 rate hikes would have had any tangible influence on that.

In the counterfactual where the Bank of Canada didn't raise rates as aggressively, there's a good chance that inflation would be tamed regardless. But they don't want to take that risk because a recession is far less damaging than prolonged runaway inflation.

They are likely overcorrecting yes. But that's my argument and issue with last year's BoC policies.

They didn't need to do this, economists pushed for interest rates to go higher in 2021 to stay in tune with inflation rising, central banks chose to keep them at historically row rates and let inflation occur naturally under the false claim it was transitory and go back close to the CPI target. It turned out to be one of the worst economic calls of all time.

BoC (and the US feds) screwed up royally in 2021 and is trying to play catch up. They clearly needed to raise rates, there is no avoiding it, but doing it sooner would have allowed for a potentially softer recession versus what we are likely to face.

[Firebot]

Originally Posted by Slava

Haha, again, how long is transitory? We can either have a discussion or you can just say that my argument is stupid.

And yes, inflation can be transitory and they could take action to make it transitory. Where does it say that you can't have both?

It's not transitory if you employ methods to fight it.

If you speed up in a car and about to hit a wall, if you brake to stop it doesn't mean that you were going to stop before hitting that wall without braking.

Remember Y2K? Nothing happened, but that's because of years or intervention and coding revision to prevent a potential catastrophe.

That concept of intervention seems foreign to you for whatever reason. Raising interest rates is intervening. Inflation will likely taper down as a result, but not because it was transitory.

Both the BoC and the US feds have stopped calling it transitory well before the Ukraine war started, yet here you are on a forum arguing why it still is.

https://fortune.com/2021/12/03/infla...easury-yellen/

[opendoor]

Originally Posted by Firebot

You are deliberately comparing a short year time M2 growth window while counting 2022 to a 10 year window average and honestly don't see a problem with this?

No, not at all. In fact it makes right now look worse because those prior periods were far more prolonged. If I took the the post-2010 period to compare to prior decades, then the monetary growth now looks quite modest:

1970-1980: 15.7% a year
1980-1990: 10.77% a year
1990-2000: 3.96% a year
2000-2010: 6.85% a year
2010-today: 6.53% a year

So even with the big increase in 2020, we're still seeing relatively low growth in monetary aggregates over the longer term which will generally lead to modest inflation (at least inflation that's influenced by monetary policy).

M2 clearly spikes significantly in 2020-21 comparatively to other time periods, last time period being early 1980.

And counting 2022 in your percentage calculation is dishonest as we are in a quantitative tightening phase and in the process of overcorrecting for past mistakes. We are removing money from the market trying to correct the mistakes of the past year and a half. Remove 2022 and do a year to year comparison, pick 2020 or 2021 and do an apple to apple comparison.

They're not removing money from the market; the aggregates are just growing more slowly. Which is the exact same thing that happened in 2007-2009. Fast growth at the worst point of the crisis (2020 was 17% vs. 2008 which was 14%), and moderate to slow growth in the other years to get things back on the long-term trajectory. It's totally normal given the magnitude of the crisis and there's nothing remotely unprecedented about it. There's a reason that basically every developed nation in the world did the same thing to varying degrees.

If you succeed in arguing on a technicality and that money printing is precedented from 40 years ago in a high inflation / high interest rate environment, it doesn't change our predicament, as central banks back in the day had policies with high interest rates and inflation in mind, and did not peg our policies to a 2% inflation CPI. Not sure the point of arguing on semantics just to prove the term unprecedented wrong when our economic ecosystem today is quite different then 40 years ago.

Over the last 50 years, the M2 growth in 2020 would rank 3rd, 2021 would rank 27th, and 2022 is on pace to rank 47th. So a pretty normal distribution given the context.

And things aren't all that different now. Over the last 50 years, inflation in Canada has roughly correlated with the increase in monetary aggregates minus 3-5% (which is more or less GDP growth). So when we had 12-17% annual increases in monetary aggregates we had 7-12% inflation rates. Now that we're seeing 6-8% increases in monetary aggregates inflation generally meets the target rate. So the current situation of monetary aggregates leading to high inflation looks like a temporary blip. Now if energy keeps getting more and more expensive year after year like it did in the '70s (oil went up 13x from 1973 to 1982), then we'll still experience inflation, but I don't see that happening.

[Firebot]

Originally Posted by opendoor

No, not at all. In fact it makes right now look worse because those prior periods were far more prolonged. If I took the the post-2010 period to compare to prior decades, then the monetary growth now looks quite modest:

1970-1980: 15.7% a year
1980-1990: 10.77% a year
1990-2000: 3.96% a year
2000-2010: 6.85% a year
2010-today: 6.53% a year

Impressive...you basically double downed on the flawed logic. Why stop at decades and just do an average of the last century to show that 2020 was just a blip?

If you add 20% new money supply in a single year, it will have negative inflationary impacts. If you add 10% new money supply the next year rather then balance out, you will have more negative inflationary impacts that has to be absorbed by the economy.

Using the 10 year average logic, why worry inflation at all? Inflation in the past 10 years still only averages to under 3% YoY from 2012 to 2022.

Averages when used erroneously are counter productive to an argument.

https://www.geckoboard.com/best-prac...cal-fallacies/

[Firebot]

Originally Posted by opendoor

They're not removing money from the market; the aggregates are just growing more slowly.

Wrong as well

https://schiffgold.com/exploring-fin...over-12-years/

https://tradingeconomics.com/canada/money-supply-m2

Money Supply M2 in Canada decreased to 2367102 CAD Million in July from 2367260 CAD Million in June of 2022. source: Statistics Canada

YOY, if we are in a prolonged period of quantitative tightening, you will eventually see a yearly decrease in money supply. The whole purpose of quantitative tightening is to shrink the money supply.

https://en.wikipedia.org/wiki/Quantitative_tightening

https://www.bankofcanada.ca/2022/04/...-floor-system/

BoC has this policy as of April 2022.

[opendoor]

Originally Posted by Firebot

Impressive...you basically double downed on the flawed logic. Why stop at decades and just do an average of the last century to show that 2020 was just a blip?

If you add 20% new money supply in a single year, it will have negative inflationary impacts. If you add 10% new money supply the next year rather then balance out, you will have more negative inflationary impacts that has to be absorbed by the economy.

Which is why looking at multi-year periods is best. If you add 15% to the M2 and don't balance it out with lower increases in subsequent years (which is the mistake they made in the '70s) you have a problem. But if monetary growth in the following years is lower to account for that one-time increase and you stick to the long-term trajectory, then it's not an issue. Not sure what's so hard to understand about that.

But if you don't like 10-year periods, how about 5-year ones?

2017-2022: 8%
2012-2017: 5.7%
2007-2012: 7.6%
2002-2007: 5.4%
1997-2002: 4.1%
1992-1997: 3.7%
1987-1992: 10.4%
1982-1987: 8.9%
1977-1982: 15.2%
1972-1977: 17.1%

I don't see anything anomalous about that. The 5-year growth is right in line with prior recessions in Canada (2008 and 1990) and significantly lower than the high inflation period of the 70s and early '80s.

Using the 10 year average logic, why worry inflation at all? Inflation in the past 10 years still only averages to under 3% YoY from 2012 to 2022.

Because inflation exists right now, so they're taking steps to lower it. And a side effect of quantitative tightening that is necessary to make up for the quantitative easing during COVID is higher interest rates, because it drives bond yields upwards.

[Mr.Coffee]

Originally Posted by opendoor

No, not at all. In fact it makes right now look worse because those prior periods were far more prolonged. If I took the the post-2010 period to compare to prior decades, then the monetary growth now looks quite modest:

1970-1980: 15.7% a year
1980-1990: 10.77% a year
1990-2000: 3.96% a year
2000-2010: 6.85% a year
2010-today: 6.53% a year

So even with the big increase in 2020, we're still seeing relatively low growth in monetary aggregates over the longer term which will generally lead to modest inflation (at least inflation that's influenced by monetary policy).

They're not removing money from the market; the aggregates are just growing more slowly. Which is the exact same thing that happened in 2007-2009. Fast growth at the worst point of the crisis (2020 was 17% vs. 2008 which was 14%), and moderate to slow growth in the other years to get things back on the long-term trajectory. It's totally normal given the magnitude of the crisis and there's nothing remotely unprecedented about it. There's a reason that basically every developed nation in the world did the same thing to varying degrees.

Over the last 50 years, the M2 growth in 2020 would rank 3rd, 2021 would rank 27th, and 2022 is on pace to rank 47th. So a pretty normal distribution given the context.

And things aren't all that different now. Over the last 50 years, inflation in Canada has roughly correlated with the increase in monetary aggregates minus 3-5% (which is more or less GDP growth). So when we had 12-17% annual increases in monetary aggregates we had 7-12% inflation rates. Now that we're seeing 6-8% increases in monetary aggregates inflation generally meets the target rate. So the current situation of monetary aggregates leading to high inflation looks like a temporary blip. Now if energy keeps getting more and more expensive year after year like it did in the '70s (oil went up 13x from 1973 to 1982), then we'll still experience inflation, but I don't see that happening.

Energy costs are DEFINITELY going up in the medium to long term. You can take that to the bank actually.

[opendoor]

Originally Posted by Firebot

Wrong as well

https://schiffgold.com/exploring-fin...over-12-years/

That's the United States.

https://tradingeconomics.com/canada/money-supply-m2

They must be using a narrower definition of M2. Statistics Canada's numbers for M2 gross show month-over-month growth in every month this year. But regardless, a one off monthly drop doesn't mean much in the wider picture. There has only been a single yearly drop in M2 in the last 50 years in Canada, so the money supply will continue to grow in 2022, just at a much slower rate.

YOY, if we are in a prolonged period of quantitative tightening, you will eventually see a yearly decrease in money supply. The whole purpose of quantitative tightening is to shrink the money supply.

https://en.wikipedia.org/wiki/Quantitative_tightening

https://www.bankofcanada.ca/2022/04/...-floor-system/

BoC has this policy as of April 2022.

Quantitative tightening is where the central bank rolls off its assets. It doesn't necessarily mean a contraction in the money supply, it just means that the central bank is reducing its holdings, which has the net effect of reducing the liquidity of private banks (which makes lending more expensive and stricter).

As you can see from the chart in your Wikipedia link, M2 growth has never gone negative in the US in the post-WWII period:

[Zarley]

Still lots of hikes to come, I reckon.

https://twitter.com/user/status/1572967417931857926

https://twitter.com/user/status/1572992863910100993

[opendoor]

Originally Posted by Mr.Coffee

Energy costs are DEFINITELY going up in the medium to long term. You can take that to the bank actually.

We would need $800-1000 oil within the next 7-8 years to match the level of energy inflation they saw in the '70s and early '80s. That's not going to happen. We're paying less for oil now than we were 10 years ago and are currently paying the same price as 15 years ago.

[opendoor]

Originally Posted by Zarley

Still lots of hikes to come, I reckon.

https://twitter.com/user/status/1572992863910100993

What a useless chart. "Here's 20 countries from 1980 to drag the average way up." If you look at the more recent ones you have:

Ireland: Went above 5% in 2000, but dropped to 3.49% by 2003. Yes it took 9 years to finally get under 2%, but they were in the 2.5-4% range basically that entire time from 2003-2008.

United States: Went above 5% in 1990, but dropped to 3% by 1992 and stayed low.

Switzerland: Briefly went above 5% in 1990 and 1991 but dropped quickly and was near deflation territory by 1994.

Germany: Went over 5% in 1992 after reunification but was just over 2% 2 years later.

Netherlands: As near as I can tell, they never went above 5% in the early '00s, but in any case they were back to 2.1% 2 years later.

So outside of the energy crisis in the 1970s, it has taken countries from that list about 2-3 years to get back in the target range which is probably a reasonable expectation for us now.

[PepsiFree]

Originally Posted by Firebot

It's not transitory if you employ methods to fight it.

If you speed up in a car and about to hit a wall, if you brake to stop it doesn't mean that you were going to stop before hitting that wall without braking.

Just wanted to point out that this is a completely incorrect understanding of transitory.

In your example, depending on where the wall is, you could absolutely stop before hitting it. Forward motion in a vehicle is transitory, as in, it is not permanent. If you let your foot off the gas it will eventually stop moving without hitting the brake. You've given an example of something transitory, funny enough.

On top of that, people employ methods to fight transitory things all the time, especially when those transitory things are damaging and can cause further damage if left to end on their own without intervention. Storm flooding is a good example. As is a fire (in keeping with damaging, dramatic events). Flooding will cease on it's own, but people regularly employ methods to fight it to limit the damage. Fires burn themselves out, but we regularly employ methods to fight them. These are transitory things in which methods to fight them are employed regularly. You need to understand what transitory means before you can even begin to evaluate whether something is or isn't, and "well they stopped using the word" is not evidence of anything other than someone's confirmation bias.

That aside, I am finding the conversation pretty interesting, but you could do less of the "your argument is stupid" and "WRONG! you doubled down on something WRONG!" as opendoor and Slava are both interesting and respectful posters, and it makes your argument look less trustworthy. Save the snark for someone who deserves it (like me!).

[Table 5]

Originally Posted by opendoor

We would need $800-1000 oil within the next 7-8 years to match the level of energy inflation they saw in the '70s and early '80s. That's not going to happen. We're paying less for oil now than we were 10 years ago and are currently paying the same price as 15 years ago.

I don't think we'll see any craziness of oil in the multiple hundreds or anything, but considering that oil consumption keeps going up globally, yet there has been a material decline in exploration and investment in the sector over the last decade, I think it's a solid bet that prices for oil will see a general uptrend for the foreseeable future. You can't print energy molecules.

[Leondros]

Originally Posted by opendoor

We would need $800-1000 oil within the next 7-8 years to match the level of energy inflation they saw in the '70s and early '80s. That's not going to happen. We're paying less for oil now than we were 10 years ago and are currently paying the same price as 15 years ago.

Don't be ridiculous - inflation adjusted we would only need $160 oil to mirror the '78 - '84 spike.

https://inflationdata.com/articles/w...art-8-2022.png

Once could also make the argument and this is getting off topic and a little too speculative that we could very well be heading into an 80's style energy crisis. If that happens some of the discussed data points become relevant.