The Bank of Canada raised its overnight lending rate for two consecutive months, after pausing its hikes earlier this year. These increases risk throwing workers into bankruptcy and triggering a painful recession.
The working class is stuck between inflation eroding their real wages and higher interest rates increasing their debt payments and bringing about job losses. This is the result of a sick system that has to be overthrown.
After a relaxation of the rate hikes from March to May, the Bank of Canada has now increased its benchmark interest rates from 4.5 to five per cent, its highest since 2001.
While inflation has come down from a high of 8.1 per cent last summer, during the same period, it remained at 3.4 per cent—above the bank’s target. The Bank of Canada and the capitalists they serve are therefore going all-in in their attempt to bring it down even more.
Tiff Macklem, director of the BoC, talked about a “difficult” decision. But overall, “the cost of delaying action was larger than the benefit of waiting.” They know this is going to cause suffering for workers, but what can you do? Bankruptcies and job losses are a price they are willing to pay.
More than 100,184 Canadians have filed for insolvency in 2022, an 11.2 per cent increase. The year 2022 was also the largest year-over-year increase in business insolvency in almost 30 years. Total household debt has also risen to $1.85 for every dollar of household disposable income, and Canada’s household debt service ratio is expected to hit “record levels,” by the end of this year. A survey from February, when rates were 0.5 per cent lower, found that nearly one in four homeowners said they would have to sell their home if interest rates went up further.
But for the capitalists, this is not enough. Not only should workers lose through increases in mortgage and car payments, but they should also suffer from austerity.
Prime Minister Trudeau’s former economic advisor Theo Argitis, for example, wrote in the Globe and Mail: “The Liberals have been deferential to Governor Tiff Macklem on monetary policy, but they’ve also left him on his own—choosing not to bring other policy levers to the inflation fight. More spending discipline, for example, would ease pressure on the Bank of Canada to increase interest rates.”
In other words, the Liberal government needs to do its fair share by stopping deficit spending and turning to austerity.
These people know their policies will bring suffering to the workers. In what kind of sick society are economic problems solved by making people lose their jobs and go bankrupt? Under capitalism, bankruptcies and job losses are just cold statistics.
But others within the ruling class have concluded from this that the collateral damage that will come with further tightening may just be too great.
CIBC economist Andrew Grantham called the BoC’s most recent rate hike “at best unnecessary, and at worst a mistake.”
Conference Board of Canada chief economist Pedro Antunes warned similarly that, if rate hikes continue: “We have essentially no growth in GDP for the next three quarters. … In this scenario we would see around 163,000 job losses, peak to trough, including those we’ve suffered over the last few months.”
In an article titled, The Bank of Canada may rue its recent interest rate hike, economist David Rosenberg said a new rate hike will be “nail in the coffin that will bury Canada’s debt-heavy economy.”
While these “experts” might be right to point to the dangers of such monetary tightening, they have yet to propose any other way forward.
The reality is that the capitalists can’t solve their crisis. For them, the problem with high inflation, from an economic perspective, is that it destabilizes the price system, including the prices of key production “inputs” like raw materials; from a political perspective, they don’t like it because it causes social turbulence.
But raising interest rates, while it has brought inflation down to a certain degree, is a one-sided tool, only affecting the money supply. The hikes can slow the flow of money and credit domestically, but they cannot increase the supply of goods domestically or globally to resolve dramatic shocks, especially for oil, wheat and other key items. Raising interest rates won’t solve the supply chain problems, increase the productivity of labour, prevent the rise of protectionism and its impact on prices, and stop events driving inflation such as the war in Ukraine. Inflation is a multi-factor phenomenon which the capitalists are largely unable to understand or control.
The capitalists are attempting to bring inflation down while hoping the slump won’t be too bad. But in this delicate balancing act, they could very well end up with the worst of both worlds, i.e. persistent inflation and a recession—stagflation.
Some signs already point to a slowdown. The Bank of Canada’s own predictions expect growth to slow substantially over the next two years. Despite talk of Canada’s economy “overheating,” Canada’s labour force participation (a more accurate measure of employment) and capacity utilization rates were both largely below their historic averages before the rate hike.
According to the Financial Post, year-over-year manufacturing, residential construction, real estate, financial services, retail and wholesale have reversed course from one per cent positive growth last year to minus 1.5 per cent.
In addition to this, unemployment has climbed, hiring has slowed, “excess capacity,” has risen and capital spending, already near record lows, is expected to fall further. After this year’s expected recession, the future, according to the Toronto Star, will likely be one of “low productivity growth and stagnant real wages.”
During the post-war boom, as was seen across imperialist powers, the Bank of Canada’s interest rate periodically rose above four per cent, yet this continued alongside more steady profits, increased exports, increased productive capacity and comparatively low unemployment. But, that sustained upswing has long since passed. Canada just suffered its worst decade since the 1930s in terms of GDP per capita growth.
It is not our job to predict exactly what the BoC will do or when a recession will come. But whatever happens, the bosses never lose under capitalism. And it is the workers who pay for the crisis—with inflation, with interest shocks and, soon enough, with unemployment. This is the future the capitalists have to offer.
We won’t pay for the bosses’ crisis
We are often told we live in a democracy. But in what type of democracy does the lives of millions of workers depend on the press conference of the unelected director of a Bank? We live in a society where the working majority is completely submitted to the dictates and decisions of a few bankers made behind closed doors.
Some on the left are calling for a stop to the hikes, but leave it at that. The left reformist magazine Jacobin, for example, says that if we explain the “ineffectiveness of interest rate hikes” and ask “policymakers to openly recognize this reality” we could “make strides toward aligning policies with the urgent challenges we face and implementing changes that serve the interests of the working majority.” How we could convince bankers to care about the interests of the “working majority” is anyone’s guess. While interest rates hikes are indeed making the workers poorer and threatening a recession, it is not sufficient to simply demand a return to the status quo—which is runaway inflation. There is no solution under capitalism, and our task is not to recommend one poison or the other.
The only solution to the crisis of capitalism is a socialist revolution. Instead of anxiously waiting for a bank director to decide on our lives, the working class needs to seize the wealth of society. By nationalizing the banks and other big levers of the economy under democratic workers’ control, the working class can plan the economy and satisfy the needs of everyone. This way, we can end the madness of rising prices, unaffordable housing, poverty, hunger and unemployment. This is a world worth fighting for.