Two major things are happening to Canadians on the cost-of-living front this week.

The Bank of Canada is raising its key interest rate by another giant leap of 75 basis points, pushing up borrowing costs and slowing down the economy in a relentless attempt to stifle inflation.

And the federal Liberals, holed up in Vancouver for their annual summer cabinet retreat, are gearing up to announce funding and legislation for dental-care support, roll out a housing subsidy and perhaps even contemplate a GST rebate for low-income people, the Star has learned.

If it were a contest for who is more effective at targeting inflation, the Bank of Canada would get the prize.

But theres a brutal downside to the sharp interest-rate hikes coming at a precarious time in the economy: they undermine growth, and thats in short supply right now. The central bank risks provoking a recession, not the soft landing for which weve all been hoping.

So if there were a contest for who is more focused on dealing with the fallout of higher prices, the federal Liberals and their NDP collaborators who have been pushing for these measures would get that prize, as long as theyre careful.

The policy and money the government puts toward easing the day-to-day costs of low-income households through helping them with housing or paying their dental bills are far more nuanced than the blunt instrument that is interest rates.

For the Liberals, dental and housing benefits also have the added bonus of partially meeting the NDPs requirements for political co-operation, keeping that party onside and avoiding an election anytime soon. The agreement with the NDP saw the Liberals commit to a $500 top-up for recipients of the Canada Housing Benefit and dental care for children under 12 in families making less than $90,000 a year.

While a GST rebate isnt on the NDPs formal list of demands, leader Jagmeet Singh has made the case for it incessantly over the past few months. He argues that corporations are profiting handsomely from higher prices, while low-income families cant make ends meet. A GST rebate for low-income households would help offset the extra costs for the most vulnerable.

Theres a downside to those measures too, of course.

For one, they could bulk up the deficit, and that could be inflationary. However, the government is running a surplus so far this fiscal year, compared to a $37-billion deficit at this time last year. Revenues from corporations are rolling in thick. Most but not all of the cost of the dental and housing announcements has been booked in the fiscal framework already.

And the spending on affordability could fuel consumption, which is also inflationary, at least in principle. However, wages are not keeping up with inflation these days, and low-income families are especially pinched.

So the design and scope of the government plans are very important. The benefits of helping low-income households with affordability need to outweigh the costs of possibly exacerbating inflation. Narrowly targeted government help that is geared to income and not too costly could meet the test.

Its a tension that will be with the government and Bank of Canada for many months to come.

The central bank served notice on Wednesday that it will continue to drive interest rates up until its satisfied inflation is well under control and settling back down to the two-per-cent range. Economists are revising their projections for growth and interest rates as we speak, but generally they anticipate a couple more small rate hikes, and then a yearlong wait while those higher rates work their way through the economy. In the meantime, we could well topple into a recession, with the weak job market and financial pain that word implies.

Thats a long, long haul for households already facing extra costs.

Number-crunchers are outdoing themselves with math to emphasize how significant the streak of oversized rate hikes will be for Canadian households. Royal Bank and Desjardins doubled down on their projections of a mild recession next year, especially as housing markets continue to soften. Credit analysts at Equifax figure the average family needs an extra $400 a month to cover inflation plus the expense around rising interest rates. Mortgage brokers at Ratehub.ca say a selected homeowner with a variable-rate mortgage will pay $236 more per month on mortgage payments because of Wednesdays rate increase.

And thats by design. The Bank of Canada makes no bones about wanting to zap the housing market and pour cold water on consumers. Its goal is twofold: soften demand so it can match struggling supply, and keep inflation expectations in check.

Looming large in the background behind this dance between the Bank of Canada and the political decision makers is the Russia-induced energy crisis that has consumed Europe and threatens to engulf much of the world in hard times. All of the best-laid plans of the Bank of Canada to push inflation down to two per cent, and the federal governments best intentions to keep spending well targeted and geared to income, could easily be thrown into disarray come winter.

The real contest will be to see who is the most nimble in the face of perpetual crisis.

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Originally posted here:

While the Bank of Canada tries to kill inflation, the Liberal government risks giving it new life - Toronto Star