The Bank of Canada finds that explaining risk to Canadians is actually difficult

After years of being ignored by almost everyone except a few bankers and financial journalists, you might think that the people who work at the Bank of Canada would be annoyed when everyone tells them what to do.

But according to the bank’s senior deputy governor, Carolyn Rogers, despite becoming a political football, the bank was criticized by leaders of both opposition parties, union lawyers, homeowners and people in the real estate industry, and by letters to the editor who offered solutions that are explained obvious and simple, she says she likes all the attention.

“I think my colleagues have really embraced that extra scrutiny and criticism,” Rogers told a group of students and young financial professionals at the University of Ottawa on Tuesday.

“We get a lot of advice. We don’t all agree with it, but we do listen to it.”

Open season on central bankers

Other financial experts worry that now that it’s open season for central bankers, Canadians are in danger of losing confidence in the Bank of Canada’s critical job of keeping our money safe and our financial system healthy.

In something called a Reddit Ask Me Anything, Rogers responded candidly to questions at Tuesday’s event.

But her message, which began with an update on the risk of instability to Canada’s financial system, was only partially reassuring.

The Bank of Canada’s recent media star status makes the hour-long session useful for those who have caught the central banking bug. It included the bank’s view on the current crypto crisis, digital madness and the risk of climate change.

A house for sale in Toronto on February 15. Rogers said rising interest rates and falling home prices are hurting more mortgage holders. (Evan Mitsui/CBC)

But as the bank warned in June in its annual Financial System Review, high Canadian debt, combined with high inflation and the rising interest rates needed to bring inflation under control, make Canada’s economy vulnerable.

At the time, the bank warned that those most at risk are people who bought homes at top prices and lowest mortgage rates, saying it’s possible those buyers would have to be sacrificed for the good of the rest of the economy.

While the risk of job losses that would have exacerbated the problem may be diminishing, Rogers said, rising interest rates and falling home prices are hitting more mortgage holders.

“The bottom line is that mortgage payments have already increased for some Canadians and are likely to increase over time for most others,” she said.

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Trigger alerts

While those with fixed-rate mortgages are getting a little rest before rate hikes kick in, an increasing number of people with variable-rate mortgages have hit the “trigger rate,” where mortgage payments simply aren’t enough to cover borrowing costs.

New data released by the bank on Tuesday shows that half of all variable mortgage holders with fixed payments now owe more than those fixed payments.

“We estimate that just about all floating rate mortgages taken out between May 2020 and July 2022 are now in this position,” economist Royce Mendes said in a research note from Desjardins on Tuesday.

LOOK | Tiff Macklem of the Bank of Canada, Peter Armstrong of CBC decipher central banking:

Another kind of trigger was also mentioned in Rogers’ speech, a reference to the kind of global or national crisis that could address Canada’s vulnerabilities and throw the economy into bigger trouble.

“The risk of a trigger that could affect financial stability has increased,” she said.

Central bankers do not predict crises, they only warn of them. But it’s not clear whether those warnings about risks have come through properly in the past. It is not clear whether people are listening now.

If there was one important message to take from Rogers’ Tuesday session, it was that the Bank of Canada is committed to informing and educating Canadians “to help them understand monetary policy,” she said. But that can be a tough call, even if our central bankers keep trying.

Financial journalists like to try to make monetary policy sound simple, but as an interview Tuesday with Jeremy Kronick, director of Monetary and Financial Services Research at the CD Howe Institute, showed, it really isn’t.

Do your own brain surgery

Kronick explained why the Bank of Canada was currently losing money because it had borrowed bonds that paid low interest rates, but paid commercial banks high interest rates for the money they had used to do so. He explained the difference between gang rates and floor rates. It’s all outlined here on what Kronick said was “a way that people understand.”

The fact is that central banking is not easy for most of us to understand. Like brain surgery, people with aptitudes spend years learning how to do it. If we want a stable financial system, we bring in experts to get the job done.

“That’s why it was a little frustrating to watch [the Bank of Canada] so much politicized,” said Kronick, noting that Rogers and her team are known for being qualified by those who really understand what they’re doing. They also know that even qualified experts cannot always predict the future.

Kronick said that when central bankers — not just the Bank of Canada — failed to foresee inflation continuing after the COVID economic crash, commentators and politicians everywhere decided they could outsmart the central bank.

Raising interest rates hurts, and siding with the Bank of Canada can make people think you’re smart. But he said eroding trust in people like Rogers is bad for central banks and bad for the rest of us.

“It’s normal for people to look for alternative solutions,” says Kronick. “I’m just not convinced that these so-called other solutions will lead to the results people want.”

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