MNI INTERVIEW: BOC May Adjust Target As Spending Pledges Mount

Canada's central bank may tweak its mandate towards the Fed's average inflation targeting regime after an election in which major parties have pledged to make life more affordable and to boost employment with deficit spending, a former adviser to the nation's biggest province told MNI.

The Bank of Canada's target of keeping inflation at 2% is up for renewal this year, and the electoral scenario may make moving towards what the Fed did possible, said Tony Stillo, Canada director at Oxford Economics and a former forecasting manager at Ontario's finance ministry. BOC Governor Tiff Macklem has also said in recent speeches he wants more job progress for women and racial minorities, at a central bank that doesn't have a dual mandate on maximum employment.

"A politician who hears that says great, let it run a little hotter, we get a little more revenue out of that," Stillo said in a phone interview. At the same time, the BOC has often said the bar for changing its mandate is high, backed by a record of hitting 2% inflation that's been more successful than the Fed or ECB.

"The most I think they might do is move towards a flexible average inflation target regime like in the U.S.," Stillo said. "That will give them a little more authority to run let inflation run hotter for a while. Even the Bank of Canada is talking about inclusiveness in their measures of the economy."

With elections on Sept. 20, Liberal Prime Minister Justin Trudeau and Conservative Leader Erin O'Toole have both laid out plans for large deficits even five years down the road, boosting growth through next year while potentially further straining some capacity limits that have boosted prices.

"I don't see a clear plan to return to balance" the books from either party, Stillo said. "The politicians would love to grow out of them, there might even be a bit of a push to inflate our way out of this high debt."

RUN IT HOTTER

Stillo's concern about deficits and central banks echoes what former BOC Governor Stephen Poloz told MNI is a global challenge-- governments seeking to let inflation slide to make repaying debts easier.

Canada's CPI has climbed to the highest in almost two decades at 4.1%. While the BOC's view is that most of that is linked to short-run pressures from the pandemic re-opening, Stillo said inflation will remain above target well into next year as consumer and government spending surge.

Trudeau's signature spending plan is ten-dollar-a day childcare that will eventually bring more women into the workforce, while O'Toole has said his main goal is spending to regain 1 million jobs lost during the pandemic. Stillo said such promises mean that no matter who wins the election, fiscal policy will boost GDP growth 0.6pp this year and 0.9pp next year, also aided from U.S. deficit spending that boosts Canada's exports.

HIGHER PRICES EVERYWHERE

Inflation became a major election issue again Wednesday as the August report showed gasoline prices up more than 30% year-over-year and homeowner replacement costs gained the most since 1987. Home prices will rise 20% this year, the national realtor board said Wednesday.

Trudeau's polling lead has largely slipped away, with polls showing the cost of living is a top issue, and the most likely outcome is now that the prime minister fails to turn his minority of seats in Parliament into a majority.

Liberal and Conservative promises to crack down on foreign speculators and vacant properties while seeking to boost supply are helpful moves on housing, Stillo said. While "these measures are the right ones to introduce" many of the issues also need further action at the provincial and local level, he said.

As for whether any government can take the blame for high inflation? Stillo said: "I don't think you can pin that on the Liberal government, it's happening everywhere."