We have updated our Privacy Policy and Terms of Use for Eurasia Group and its affiliates, including GZERO Media, to clarify the types of data we collect, how we collect it, how we use data and with whom we share data. By using our website you consent to our Terms and Conditions and Privacy Policy, including the transfer of your personal data to the United States from your country of residence, and our use of cookies described in our Cookie Policy.
{{ subpage.title }}
Governor of the Bank of Canada Tiff Macklem walks outside the Bank of Canada building in Ottawa, Ontario.
Know when to hold ‘em
As always, the bank said it may raise rates in the future if inflation picks up. But experts are warning that with mortgage renewals coming due for 74% of Canadian homeowners – roughly three million people – over the next year and a half, there will be a significant risk of default. Plus, the risk of a recession still looms. That may push the bank to consider a cut sooner rather than later. In September, Prime Minister Justin Trudeau predicted rates would fall by mid-2024.
Economists in the United States are thinking roughly along the same lines as Trudeau – though they’re a bit less optimistic. As the Financial Times reports, its FT-Booth survey expects the Fed will hold rates at a two-decade high until “at least” July, possibly later. The US economy has remained strong, with GDP growth hitting an annualized 5.2% in the last quarter.
Observers are watching for signs of a recession on both sides of the border while households stretch to meet monthly bills, rent, and mortgages. The Bank of Canada and the Fed will continue to walk a fine line between taming inflation and sending households over the financial cliff.
Shawn Fain, president of the United Auto Workers (UAW) speaks as President Joe Biden joins striking UAW members on the picket line in Belleville, Mich., in September.
Could union wage hikes worsen inflation?
It may be cold out, but bankers up north are sweating thanks to a flurry of union settlements that could, according to a new report from Toronto-Dominion Bank, have “staying power.”
For years, unionized workers’ pay failed to keep pace with inflation, but now labor negotiators are pressing to close the gap. The successful UAW strike in the United States led to 11% wage increases, and Canadian union settlements, though not as high, are rising as workers try to make up for ground lost to inflation.
This is not expected to slow the struggle against inflation in the United States because only 10% of the US workforce belongs to unions. But in Canada, where about 30% of the workforce is unionized, juicy settlements have a bigger economic impact.
While the deals should not be enough to cause inflation, they may make it harder to tame, and this could mean more trouble for Justin Trudeau’s embattled government if Canadian voters see inflation falling in the United States more quickly than in Canada.
Plus, Canadian homeowners are angry about the looming mortgage shock that will see many of them renew at higher rates. Finance Minister Chrystia Freeland just introduced the Canada Mortgage Charter, a set of voluntary guidelines to protect homeowners under financial pressure, that she expects banks to follow. But more than three million Canadians are facing mortgage renewals in the next 18 months, which means higher payments for most – as well as foreclosures for some.Rwandan President Paul Kagame attends the lighting ceremony of the Rwandan genocide flame of hope, known as the "Kwibuka" (Remembering), to commemorate the 1994 Genocide at the Kigali Genocide Memorial Center in Kigali, Rwanda April 7, 2023
Hard Numbers: Rwanda’s Kagame will run again, the EU takes on Uber, water contamination threat in Libya, US Fed keeps cool
4: Rwanda’s President Paul Kagame, who has been in power since 2000, announced that he’ll run for a fourth term in next year’s election.
Kagame, who has been accused of cracking down on the opposition, tweaked the constitution back in 2015 to extend presidential term limits. Asked about what “the West” might think of his move, Kagame, didn’t mince words: “What these countries think is not our problem.”
40: A top Uber executive has warned that an EU proposal to classify gig workers as employees could boost ride prices by as much as 40%. Brussels says Uber should provide more job security and benefits for its employees. Uber, which has come up against similar battles in Spain, the UK and elsewhere, says the measure will hurt consumers and lead to “devastating” job losses.
4,000: Over a week after a catastrophic flood tore through two dams in eastern Libya, killing 4,000 people (while 9,000 remain missing) the UN has warned that sewage is contaminating water supplies, raising the specter of waterborne diseases like cholera, diarrhea, and hepatitis.
5.25-5.55: The US Federal Reserve held interest rates steady at 5.25-5.55, still the highest level in more than two decades after 11 rate hikes beginning in March 2022. The decision gives policy makers some breathing room to plot their next moves amid subsiding inflation. Still, with price growth well above the Fed’s 2% target, rates could stay above 5% well into 2024, analysts warn.Correction:Yesterday, we incorrectly stated that the Fed's pause was the first in 18 months. The Federal reserve also paused rate hikes in June, 2023. We regret the error.
A view of graffiti at the damaged port area in the aftermath of a massive explosion in Beirut, Lebanon
Hard Numbers: Beirut explosion anniversary, Navy sailors charged with spying for China, UK raises interest rates, Russian bombs destroy historic church, Germany defeated in World Cup
3: Friday marks three years since the horrific Beirut port explosion that killed more than 200 people, wounded thousands, and extensively damaged the Lebanese capital. The blast occurred after hundreds of tons of ammonium nitrate were improperly stored at a port warehouse despite repeated warnings of the danger. Meanwhile, efforts to hold senior government officials accountable have repeatedly been blocked by a corrupt judicial system. Sadly, Lebanon’s culture of impunity lives on.
2: Two US Navy sailors were arrested in California on Thursday on charges of spying for China. Both allegedly earned thousands of dollars by passing their handlers secret information about the Navy's Pacific fleet. One of the men is a naturalized US citizen who was born in China. The arrests will heighten Washington's already keen concern about Chinese espionage, but this may also lead to calls from some quarters for more scrutiny of people of Chinese descent in the US. In 2022, the Biden administration ended a controversial Trump-era initiative to combat Beijing's spying because of concerns that it unfairly targeted Chinese or Chinese-American scientists and students.
15: The Bank of England raised its main interest rate to 5.25%, a 15-year high. We know this headline is getting stale, as central banks on both sides of the Atlantic have been raising rates to try to bring down stubbornly high inflation since the early days of 2022. The UK said it is likely to raise rates again in September – bad news for those seeing their rents and mortgages rise amid a cost-of-living crisis.
8: The Russian military bombed a landmark church in the Ukrainian city of Kherson, injuring 8 civilians. Built in 1781, the church held the remains of Prince Grigory Potemkin, an 18th-century Russian military commander who encouraged Catherine the Great to expand the Russian Empire into what is now southern Ukraine. Ukraine appeared to hit back today by targeting two Russian-controlled ports in the Black Sea, another sign that Kyiv is expanding its mission to target Russian infrastructure.
1: Germany – the second-ranked team in women’s soccer – made its earliest-ever exit from the World Cup after tying 1-1 with South Korea when it needed a win to proceed to the next round. This is the first time Germany has failed to make it past the group stage. South Korea scored its first goal of the tournament but is also out – it was effectively eliminated before the game began.
Chair of the Federal Reserve Jerome Powell testifies during a House Financial Services Committee hearing.
There’s no party like a rate hike party
Rate hikes will continue … until morale declines or a recession hits. That’s the message market watchers expect, despite slowing inflation, from the Bank of Canada’s next meeting on July 12. The Canadian economy has stayed hot despite the Bank’s effort to cool it with increased interest rates, including a 25-point increase in June.
Federal Reserve Chairman Jerome Powell has indicated the US should expect more hikes, too. And with economists now believing the odds of a US recession are dropping, thanks to a strong labor market and strong consumer demand, the Fed may have no choice but to continue driving up borrowing costs.
Both central banks have signaled that rate hikes have had an effect, but wage growth rates aren’t cooling fast enough, and employment rates remain high. Predictions of a recession on both sides of the border have gone back and forth for months.
The US is Canada’s largest trading partner, so Fed decisions are being watched closely by Canadian economists.
Consider that 70% of Canadian exports go to the US, while only 17.5% of US exports go to Canada. US interest rate hikes, and how they impact exchange rates, can have an outsized impact on the Canadian economy. And if interest hikes lead to a US recession, this could push Canada closer to the brink by driving down demand, contracts, and prices.
US EU and UK currencies
EU inflation vs. US inflation
Rapid inflation has been hitting the headlines and consumers' pocketbooks in the US and the EU for two years. But now it seems like the tide could be turning — in America at least.
Last week, the US Federal Reserve paused its interest rate hikes for the first time in 15 months. Meanwhile, the European Central Bank increased rates to their highest point in over 20 years, and signaled another hike to come next month.
Both US and EU annual inflation declined last month, now standing at 4% and 6.1%, respectively. That’s much lower than a year ago, but still above the 2-3% target that central banks aim for.
What’s different about how the US and EU economies — and central banks — are faring in the inflation fight?
Oil and gas prices declined last month, easing inflation in both economic zones. But for the US, oil being priced in dollars and the dollar itself gaining strength, meant that oil was more expensive for other currencies, to the detriment of the euro. The US also upped its domestic energy supply, making gas and grocery items — which depend a lot on energy prices — less expensive.
The EU doesn’t have the luxury of cheap domestic energy, so high energy prices have proved more intractable after they lost access to Russian oil. The war in Ukraine has also caused food prices in Europe soar above other advanced economies, in part due to a severe drought in Spain. The EU also saw a decline in food prices this month, but only to a still-painful 15%.
The takeaway: The US economy is more dynamic — loosely defined as more open to risk — than the EU’s, so change, both good and bad, happens faster. That means disruptions like inflation will hit the US sooner, but also allow it to recover quicker.
Yet wage growth, which is a major contributor to price increases, is still high in both economies. Wage pressures have led the ECB to predict that detrimentally high inflation will continue through 2025 — even with more rate hikes on the horizon.
The real difference lies in how the two countries are navigating the final stage of the inflation fight. While they have pushed down inflation from high to moderate levels, historically, getting from moderate to low is a lot harder.
The ECB isn’t seeing inflation fall from other economic factors like the US. So with rate increases as its only weapon, it's forging ahead with hikes despite evidence that the eurozone slipped into a technical recession earlier in June.
For its part, the Fed can afford to push pause — for now — on interest rate hikes, which have been blamed for recent turmoil in the banking sector. Two more hikes are expected by the end of the year, but America’s central bank is taking its time to make sure it doesn't tank the economy in the process of taming inflation.
Traders react to Fed rate announcement on the floor of the NYSE in New York.
US economy’s slowing growth
The US economy grew by just 1.1% year-on-year in the first quarter of 2023, suggesting that the Federal Reserve’s tightening of monetary policy to stamp out inflation is indeed slowing down the biggest economy in the world.
It’s a big drop from the 2.6% growth rate recorded in the last quarter of 2022 and suggests that the Fed’s spree of interest rate hikes since last year — raising the benchmark policy rate from around zero to 5% — is starting to have an impact despite consumer demand, which had so far remained strong due to a tight labor market and steady wage growth.
Ahead of next week’s policy meeting, Fed Chair Jerome Powell will be weighing up whether to keep tightening or to hit the brakes so as not to send the economy into a recession.
But there are still many unknowns on the horizon, including a looming crisis in Congress over raising the debt ceiling that could send markets into a tizzy, as well as more fallout from the ongoing banking crisis. This comes as many analysts, including Fed officials, say that the US will enter a recession later this year before the economic recovery can begin.Turkish President Recep Tayyip Erdogan.
What We’re Watching: Three ways to address inflation … with varying degrees of success
Erdonomics: Growth > stability
Turkey has long had a hyperinflation problem, but that doesn’t mean that its central bank has sought to raise interest rates to bring prices down. In fact, Turkey’s President Recep Tayyip Erdogan, whose unorthodox economic approach has been dubbed Erdonomics, has even sought to lower interest rates during inflationary times. Why?
Central to his approach is the belief that economic growth trumps all, including price stability. So Turkey’s central bank has been unwilling to raise interest rates to reverse hyperinflation, and Erdogan has even called himself an “enemy” of interest rates.
As the Turkish president explains it, keeping interest rates low – and static – stimulates demand, driving economic growth.
But that hasn’t panned out. Inflation in Turkey soared to a quarter-century high of 85% in October – largely due to roaring food and fuel prices. Crucially, analysts think the official number was closer to 186%, meaning prices would have almost tripled. As a result, the average Turk has far less disposable cash to inject into the economy. What’s more, Turkey has seen its currency, the lira, plummet a whopping 90% since 2008.
What do Turks think of the cost-of-living crunch? They will get to weigh in on May 14, when the country heads to the polls. Erdogan is facing a united opposition that has been pushing the message that he has wrecked the economy.
Price controls and unintended consequences
Inflation = prices going up. But what if they just … didn’t?
That’s basically the thought process behind price controls, an alternative tactic for fighting inflation where the government mandates maximum prices for goods. While this might sound good, price controls remove the magical balance of supply and demand: When something is expensive, it signals to producers that they can profit by increasing supply. But if the government artificially holds down prices, producers aren’t incentivized to meet demand, which leads to supply shortages, inefficiencies, and unintended consequences.
Most economists believe that monetary policies can tame inflation without capping prices. But with inflation now running rampant, some left-wing policymakers and economists are revisiting the idea. In 2022, US Sen. Elizabeth Warren proposed a bill to outlaw “abusive price gauging” during market shocks. Progressives argue that price caps help the poor, but there’s a catch.
The thing about price controls is that they tend to work in the beginning. In 1971, President Richard Nixon tried to nip inflation in the bud by implementing a 90-day freeze on most wages, prices, and rents. The result: Inflation fell by 50% ... at first. But as soon as the government eased restrictions, prices shot back up, requiring another round of caps that barely made a dent. The takeaway: Price controls might help in the short run, but not in the long run.
Argentina has long been addicted to using price controls for political gain. In late 2021, after an electoral loss attributed to 53% inflation, the ruling party slapped price controls on over 1,400 products. But like the last time the government did this in 2013, it’s only making inflation worse — currently over 100% year-on-year.
The historical upshot of price controls: When the precise balance of supply and demand is replaced by the blunt axe of government policy, the solution is more likely than not to be worse than the problem.
The Goldilocks approach to adjusting interest rates
Western central banks are, broadly speaking, focused on two key things: Keeping inflation down and employment up. To strike the right balance, and, like Goldilocks, ensure that the economy is neither too hot nor too cold, many central banks adjust interest rates to prevent the economy from overheating.
Given the inflationary pressures of the past year – as a result of the war in Ukraine, supply chain kinks, and pandemic stimulus – the US Federal Reserve, European Central Bank, Bank of England, Bank of Canada, and others, have aggressively raised interest rates to increase the cost of credit within their respective economies.
While interest-rate policy aims to keep consumer prices steady (global food prices, in particular, have soared), central banks’ policies also influence – and are influenced by – financial behaviors.
For example, market turmoil in the US in recent times has tampered with investors’ appetite for risk. This has partly contributed to mass layoffs in the tech sector, something the Fed is watching closely as it adapts its interest-rate policy.
But not all wealthy countries are adopting this approach. For instance, the Bank of Japan, which has long focused on keeping interest rates low to stimulate growth, has left interest rates at - 0.1%, leading to stubbornly high prices for consumers.
__________________________________
Not everyone hates inflation – just ask the dinosaur skeletons
Rising prices are a headache for most people, but not everyone is unhappy. People who have low fixed-rate mortgages or other fixed-cost debts, for example, actually get a break from inflation, because it has the effect of reducing the burden of repaying or servicing what they’ve borrowed. Paying what they owe costs less because the currency has lost value compared to when they took out the mortgage.
Meanwhile, there are folks who hold assets that tend to rise in value when inflation goes up, such as stocks in energy or food production companies. Another is gold, which generally rises in value during bouts of inflation because it’s seen as a more stable store of value — after all, it’s been used as money for 2,500 years.
But the most colorful beneficiaries of inflation may be hoarders or other collectors of items like Rolex watches, fine art, classic cars, designer handbags, sports memorabilia, fine wines, and even dinosaur skeletons!
As inflation drives down the value of money, people invest in items like these, which are seen to hold value more predictably than cash. Not everyone has access to a fine wine cellar or a classic car garage, but surely you’ve got an unexpected inflation hedge lurking in some old shoebox somewhere, don’t you?
Tell us what you collect/hoard for rainy days here.