The Bank of Canada is finding that explaining risk to Canadians is really hard

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 upset if everyone told them what to do.

But according to the bank’s senior deputy governor, Carolyn Rogers, even as the bank became a political football criticized by leaders of both opposition parties, labor advocates, homeowners and people in the real estate business, and by letters to the editor that offer solutions that are declared obvious and simple, she says they like all the attention.

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

“We’re getting a lot of advice. We don’t agree with everything, but we listen to everything.”

Open season on central bankers

Other financial experts worry that now that it has become open season for central bankers, there is a danger that Canadians will lose confidence in the crucial work that the Bank of Canada is doing to keep our money safe and our financial system sound. .

In something like Reddit’s Ask Me Anything, Rogers candidly answered questions at Tuesday’s event.

But his message, which began with an update on the risk of instability in the Canadian financial system, was only partly reassuring.

Bank of Canada’s recent media star status makes the hour-long session useful Viewing without intermediaries for those who have caught the central bank bug.. It included the bank’s participation in the current crypto crisis, digital madmen 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 levels of Canadian debt, combined with high inflation and the rising interest rates needed to control inflation, make the Canadian economy vulnerable.

At the time, the bank warned that those most at risk were people who bought a home at high prices and low mortgage rates, and said 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 waning, Rogers said, rising interest rates and falling home prices are hurting more mortgage holders.

“The bottom line is that mortgage costs for some Canadians have already risen and are likely to rise for most others over time,” he said.

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Activate warnings

While those with fixed-rate mortgages get a bit of a break before rate increases begin, an increasing number of those with floating-rate mortgages have hit the “firing rate” where mortgage payments are simply not enough to cover borrowing costs.

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

“We estimate that nearly all adjustable-rate mortgages taken between May 2020 and July 2022 are now in this position,” economist Royce Mendes said Tuesday in a Desjardins research note.

CLOCK | Bank of Canada’s Tiff Macklem, CBC’s Peter Armstrong decode central banking:

Another type of trigger also received a mention in Rogers’ speech, a reference to the type of global or national crisis that could act on Canada’s vulnerabilities and send the economy spiraling into bigger trouble.

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

Central bankers don’t predict crises, they just warn about them. But it is not clear that such risk warnings have been given in the past. It’s not clear if people are listening now.

If there was one main message to emerge from Rogers’ Tuesday session, it was that the Bank of Canada is eager to inform and educate Canadians “to help them understand monetary policy,” he said. But that can be drudgery, despite the fact that 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 Research for Monetary and Financial Services at the CD Howe Institute showed, it really isn’t.

Do your own brain surgery

Kronick explained why the Bank of Canada was losing money at the time, because it had borrowed bonds that paid low interest rates but was paying commercial banks high interest rates on the money they had used to do so. He explained the difference between broker fees and floor fees. This is all described here in what Kronick said was “a way that people understand.”

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

“That’s why it’s been a bit frustrating to see [the Bank of Canada] so politicized,” said Kronick, noting that Rogers and his team are known to be qualified by those who truly understand what they’re doing. They also know that even qualified experts can’t always predict the future.

Kronick said that when central bankers, not just the Bank of Canada, failed to foresee that inflation would continue after the COVID economic collapse, commentators and politicians around the world decided they could outthink the central bank.

Rising interest rates hurt, and taking sides against the Bank of Canada can make people think you’re smart. But he said that eroding trust in people like Rogers is bad for central banking and bad for the rest of us.

“It’s natural that people are looking for alternative solutions,” Kronick said. “I’m just not convinced that these so-called other solutions are going to lead to the results that people want.”

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