Skip to main content

The central bank’s embrace of quantitative easing, buying up hundreds of billions of dollars’ worth of government of Canada bonds on the secondary market, has sparked Tory accusations that it is printing money to bankroll Liberal deficits.PATRICK DOYLE/The Canadian Press

Champagne corks are poised to pop on Bay Street as banks and investment dealers prepare to celebrate a banner year in the financial industry by handing out fat bonuses to their employees.

On Tuesday, Bank of Nova Scotia raised its dividend by 11 per cent, becoming the first of the big banks to report rosy 2021 earnings. Others are expected to follow in coming days, underscoring the boom Bay Street has experienced since the onset of the COVID-19 pandemic in early 2020.

Average Canadians can be forgiven for feeling somewhat left out of the party. While Bay Street rakes in hefty profits, ordinary consumers are finding their paycheques do not go as far as they used to at the grocery store or gas pump. Inflation is eating away at their stagnant income.

This disconnect between Main Street and Bay Street has left the Bank of Canada with some explaining to do, as it fends off criticism that the extraordinary monetary stimulus it has unleased in the past 18 months has served mainly to line the pockets of already rich bankers and investors, while igniting inflationary pressures that disproportionally hurt working-class Canadians and the poor.

The central bank’s embrace of quantitative easing, or QE, buying up hundreds of billions of dollars’ worth of government of Canada bonds on the secondary market, has sparked Tory accusations that it is printing money to bankroll Liberal deficits.

“There was not enough money in the whole world to lend the government enough to spend and fulfill its appetites,” Conservative finance critic Pierre Poilievre told the House of Commons last week. “That is why it directed the Bank of Canada to create the cash out of thin air, which, unfortunately the bank was all too happy to do, and now we see the consequences.”

The Liberals aren’t to blame for inflation, but they are piling wood on the fire

Freeland must tread carefully in debate on Bank of Canada’s inflation mandate

While there is much debate about long-term impact of these policies, there is no denying that they have helped fuel an extended bull market on Bay Street.

Mr. Poilievre, who was recently renamed to his critic’s post by Tory Leader Erin O’Toole after being demoted earlier this year, said Bay Street was “not happy” about his reappointment “because I am the one who has been speaking out against all of the free money the government has been pumping into the financial system, inflating their assets.” He said that QE has been a huge boon for the banks, allowing them to “arbitrage a profit” by selling government bonds they purchase at auctions to the central bank at a higher price.

Mr. Poilievre insisted the increase in the money supply resulting from QE, which he pegged at 23 per cent since the onset of the pandemic, is the primary factor driving inflation to a nearly two-decade high of 4.7 per cent in October. But his explanation is a partial one at best.

“Inflation is a stew with several ingredients that make up its current flavour,” said CIBC chief economist Avery Shenfeld, citing monetary and fiscal stimulus, a surge in goods consumption amid factory constraints, and prices for many goods and services bouncing back from last year’s pandemic lows. “One can’t readily disaggregate the impacts of each of these, in part because we don’t have historical precedents for some of them.”

Bank of Canada Governor Tiff Macklem has blamed rising prices primarily on snarled global supply chains, describing the phenomenon as “transitory but not short-lived.” But he has been less forthcoming about whether the bank’s own policies have contributed to rising asset prices.

There are increasing signs that consumers and businesses are not buying the bank’s spiel.

“From an economic perspective, something is transitory when it does not lead to a change in behaviour. But consumers are changing behaviour,” said Sohaib Shahid, director of economic innovation at the Conference Board of Canada.

According to recent Conference Board’s surveys, half of Canadian businesses expect inflation of 5 per cent or higher over the next six months, while consumers expect higher inflation to stick around for years. Such sentiments are bound to influence spending and investment decisions.

Canada’s money supply did indeed rise sharply between mid-2020 and mid-2021, with M2, the main gauge of monetary aggregates monitored by the economists, increasing by about 18 per cent. But year-over-year growth in M2, which is comprised of cash, chequing accounts and liquid assets, has recently fallen to about 10 per cent.

One of the reasons for that is the central bank’s October move to end its QE program, becoming the first G7 central bank to do so. It is now only purchasing government bonds to replace maturing debt.

Even so, the additional bank reserves resulting from QE to date have, in theory, created the conditions for an inflationary spiral. Whether it takes off depends on the velocity of money, or the rate at which such reserves are lent out or invested. But Mr. Macklem and his colleagues do not talk much publicly about this byproduct of QE.

“Th bank needs to communicate a little better about what it is doing and why,” said economist Christopher Ragan, director of the Max Bell School of Public Policy at McGill University. “To what extent does it think there is [an inflationary] threat from this credit and money supply growth?”

Mr. Poilievre may distort the central bank’s actions, but his critique of monetary policy risks gaining traction with Canadians unless Mr. Macklem addresses it head on.

Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.