MNI BOC WATCH: Another Hawkish Hold Seen As Economy Slows

Bank of Canada Governor Tiff Macklem is widely expected to hold the country's lending rate for a second meeting Wednesday, judging the highest rate since 2001 is finally putting the brakes on an overheated economy while likely warning the BOC could still tighten further if inflation appears stuck above target.

Nineteen of 20 economists surveyed by MNI say the target rate will remain 5% in the decision at 10am EST, with a handful closing bets on a hike after last week's CPI report showed price gains slowing to 3.8%. In other signs of softening activity, second-quarter GDP slipped 0.2% and unemployment has risen in recent months as record immigration boosts labor supply.

BOC officials, like their global counterparts, will likely keep hawkish language in their statement Wednesday even amid a rise in global bond yields, which help the inflation fight for now but could easily turn the other way if bondholders return to their earlier pattern of aggressively betting on cuts. Macklem told reporters at IMF meetings earlier this month higher yields are no substitute for any needed policy action, and suggested the Middle East conflict so far was more a source of volatility rather than something throwing Canada's economy off track.

"The Bank will need to reconcile a sharp downgrade to its growth outlook with signs of more persistent inflation pressures, but we look for a hawkish tone with an emphasis on stronger inflation/wage pressures and no change to guidance as it keeps rate hikes on the table," TD Bank strategists wrote in a research note. Macklem holds a press conference after the briefing and releases a new quarterly economic forecast.

HIGH FOR LONG DEBATE

Price pressures have certainly not been vanquished. Consumers and firms don't see inflation returning to target for two or three years while recent autoworker bargaining has included 10% annual raises and a return of 1970s style cost of living clauses, and over the weekend workers along the St. Lawrence Seaway went on strike. (See: MNI INTERVIEW: BOC Could Hike Once Or Twice More, Dodge Says)

Core inflation also remains close to double the Bank's target and its July forecast already showed inflation above target until mid-2025, about the outer limit of how long a rate hike is seen slowing demand. Fed officials are also toying with one more hike, although they have strongly hinted that they will hold rates steady on Nov. 1.

BOC officials may still want to avoid overtightening amid public opinion polls showing anger around high interest rates and potentially blame from political leaders for any recession. Raising rates further may also rattle fault lines in one of the world's most stretched housing markets.

“We don’t want to do more than we have to, we don’t want to make this more painful than it has to be, but we don’t inflation to persist,” Macklem said earlier this month. "Do we stay with a policy rate at 5% and let past interest-rate increases work through the economy and relieve price pressures, or is the weight of the evidence of all of those economic indicators when you put them together is it telling us that more action is needed to restore price stability?"

Even with near unanimity for a hold, Macklem has shown a habit of unexpected moves. Another way the Bank could signal hawkishness is returning to the idea of a high-for-long policy that's also being debated at the Fed, pushing back on investor bets the BOC may start cutting as soon as the second quarter of next year. (See: MNI INTERVIEW: BOC Seen On Hold Until Mid-2024 Cut- Stillo)

Bank of Canada policy rate