Photo: Netflix/IFXA Ltd

By Michael O’Neill

Squid Game is a Netflix show with a deadly twist on childhood games. By now, most of you have heard the show is about heavily indebted people competing in kid competitions in hopes of winning a massive cash prize.

Many Canadians are unwittingly competitors in the low-rent Bank of Canada (BoC) version of the show. Governor Tiff Macklem is the Host, and there are no cash prizes at the end.

The BoC left interest rates unchanged and announced an end to quantitative easing. They will still be buying bonds, but only to replace maturities. They are continuing to provide monetary stimulus but at a static level. No surprise there.

The surprise is the Bank’s seemingly reluctant nod to inflation realities.  Canada CPI rose 4.4% year over year in September, which Statistics Canada said was the fastest pace since February 2003.

The BoC now forecasts domestic inflation to rise to 5.0% by the end of the year, then drop to around the 2% target by the end of 2022.

The Monetary Policy opening statement blamed “ongoing supply-side disruptions and related cost pressures as well as energy price” for putting “upward pressure on many prices around the world.”

But have no fear. Inflation will not be a problem for Canadians. Governor Macklem asserted, “I want to assure Canadian’s that we can, and we will, keep inflation under control. We understand our job. Our job is to make sure that the price increases we’ve seen in many globally traded goods don’t feed through and translate into ongoing inflation.

Except, Mr Macklem did not say how he would control inflation. The usual central bank response is to raise interest rates which the BOC expects to happen in “the middle quarters of 2022.”

That hike is earlier than he suggested at the September meeting but a few months later than traders expect. The Montreal Exchange’s Canadian Interest Rate expectations tool suggests an 85% chance of a 0.25% hike in March 2022, and a 71% chance that rates will be 1.0% by June 2022.

Chart: Implied short-term interest rate movements and probabilities based on BAX prices

Source:  Montreal Exchange

The era of ultra-low Canadian interest rates is over. Long-live the low-rate era.

But that is only if the economy evolves the way the BoC expects. They have been known to be wrong.

The BoC expects inflation to ease at the beginning of 2022 as temporary, pandemic-related factors fade. But will they?

Source: BoC MPR

Soaring oil prices have boosted inflation in countries around the world. West Texas Intermediate (WTI has jumped over 75% since January 6, and oil analysts from Goldman Sachs, Bank of America, and others predict $100.00/barrel before year end. Why stop there?

Politicians around the world have embraced an ambitious shift to alternative energy sources to combat climate change. They have flocked to the UN Climate change conference in Glasgow, Scotland. Over 100 hundred world leaders will be in attendance, and you can bet your last dollar that none of them will arrive using public transportation. Their collective carbon emissions to attend this bun-fest equals a small city. Can you say “hypocrites?”

Perhaps they will assuage their guilt by promising to plant trees (using your tax dollars) or actively offset the emissions using the soon-to-be-launched ICAP-Speedwell Climate index based in London.

Alternative, clean energy solutions are hyped as a climate change magic bullet.  Why power the world with carbon when you can get it from the sun, the moon, the stars, and the wind.

The government of Prime Minister Trudeau wants Canada to be a leader in the fight against climate change. He named an environmental activist from Quebec (naturally) Steven Guilbeault as Minister of the Environment and Climate change.

Mr Guilbeault is charged with lowering Canada’s 1.5% share of total global emissions. The Trudeau government has already added a carbon tax (they call it a pollution tax) which they claim will have no impact on GDP.

Source:  Canadian Association of Petroleum Producers

How can it not? Making Canadian consumers and businesses pay more for goods and services will reduce consumption and make Canadian exports less competitive. China, with over 25% of global emissions, doesn’t have any such barriers.

In March 2021, the Fraser Institute released a study concluding the Federal Government’s “Healthy Environment and Healthy Economy (HEHE) plan, which includes a $170-per-tonne carbon tax to be phased in over nine years,” will knock 1.8% off GDP growth and lead to 184,000 lost jobs.

The International Energy Agency’s (IEA) World Energy Outlook published in October notes that the post-pandemic recovery put major strains on the global energy system, leading to sharp rises in coal, natural gas, oil, and electricity prices.

Supply-chain disruption is the go-to excuse for central bankers to justify their misread of inflation trends. To be fair, it is a reasonable excuse. However, if they didn’t see it coming, why should markets believe they know where it’s going?

In this BoC Squid Game, Canadian’s are the calamari.