MNI: Tight BOC Policy No Longer Needed - CD Howe

Tight Bank of Canada policy is no longer needed with the economy weakening enough to return inflation to target, according to a new set of leading indicators from the C.D. Howe Institute developed by former central bank researchers.

"In aggregate, these conclusions suggest the Bank of Canada’s tightening cycle should be coming to an end and are possibly indicative of the need to cut," according to a paper by Jeremy Kronick, Steve Ambler and Mawakina Bafale. Before joining C.D. Howe Kronick spent some time working at the BOC while Ambler is a former special adviser to the central bank. Leading indicators are "flashing warning signs," they write in a paper set to be published Thursday.

Governor Tiff Macklem held the key rate at the highest level since 2001 at 5% on March 6 and told MNI in an interview he could move quickly if needed but needs to see sustained progress on inflation. (See: MNI INTERVIEW: BOC's Macklem Says Can Move Rapidly If Needed) The latest CPI report on Tuesday showed a second month with prices advancing less than economists predicted, with the headline rate holding below 3% for the first time since pandemic shutdowns eased.

"With economic activity typically leading inflation, inflation seems set to continue back to the 2% target," Bafale, a research officer at the Institute, wrote in the paper.

The results are based on a new leading economic indicator with data that will be free to the public and updated monthly. The leading indicator is now "commensurate with previous declines during the 2001 dot-com crash and the 2008 Great Financial Crisis," the authors wrote.

“The current level of economic activity is where it was in February 2021, the last time inflation was at or below the 2% target,” Ambler said.

The timing of a potential rate cut is less clear, with another new indicator based on Taylor rules showing the Bank's policy rate in an appropriate range.