It feels like it’s interest rates as a labor disciplining mechanism at this point (other than the fact that it’s basically the only button they have).
Maybe/probably but it’s a false dichotomy. Interest rates are only one mechanism for controlling inflation, and a target coarse one.
Consider housing, increasing the interest rates makes it harder to buy a house, but it also makes it harder to build a house. Since this inflationary spiral we seem to be getting sucked into is at least partly (probably mostly) tied to restricted supply of “the stuff to buy” side if the balance, prolonged high interest rates could lead to stagflation.
This same high inflation also effects capital spending at any company seeking to expand production.
I’m not an economist, and I’m sure you’d get three different answers from two different economists, but I’m thinking we’re getting into that tickle point where interest rate hikes might start putting us into stagflation. Fundamentally, central banks aren’t going to fix this global inflation problem by playing with interest rates. You’re dealing with a real loss in production wrt the pandemic, and now a major land war in a highly agriculturally productive area of the world.
Raising rates seems to do two things to housing:
- encourage targeting luxury housing - if you’re rich, prices aren’t as important
- encourage selling to larger landlords - more apartments, fewer condos/townhouses
Builders are still going to build, they just need to target people who can afford the higher prices.
Say that to the people who will eventual default on their mortgages and lose their homes. Economics is the only social science that behaves as if it were a natural science where everything is self-evident. That’s not to say that low interest rate are inherently good but that the mechanism itself that is used to combat any form of inflation is a very limited tool.
Houses got stupid expensive because interest rates were too low. People bought houses uses cheap debt without considering the possibility that interest rates would go up, and bought houses they couldn’t afford. Interest rates never should have been so low in the first place.
I agree that it’s unfortunate the central bank can only change interest rates. At the same time, fiscal policy often runs in the opposite direction. I wouldn’t be opposed to giving BoC some control over taxation, within a limited margin. It would give them one more tool so to speak.
