MNI INTERVIEW: Another 100BP Canada Hike Possible- Ex Adviser

The Bank of Canada could raise interest rates by another percentage point at the next meeting in September to help catch up with inflation according to David Laidler, a former adviser to the central bank and retired Western University professor.

The Bank's move Wednesday to 2.5% leaves borrowing costs well below inflation that's likely now between 8% and 9%, he said. While price gains are likely to slow, the overnight rate needs to exceed CPI at some point to check inflation, he said.

“I wouldn’t be surprised if the next interest rate hike was another 100 basis points," said the author of several books on Canadian monetary policy.

Governor Tiff Macklem's description of the rate hike as 'front loading' rings hollow after forward guidance earlier in the pandemic suggesting rate increases wouldn't be needed until well into this year, Laidler said. The biggest rate hike since 1998 is still a welcome change of course that puts the Bank on a better path, he said.

The move also creates room for the Bank to deal forcefully with the next downturn: "They’ve got themselves away from a stance where they feel they only have to lower interest rates 25 basis points at a time."

INFLATION MAY REMAIN STUBBORN

“The Bank of Canada has been behind the curve really since last fall, and this is more like catching up than front loading quite honestly, but you can’t expect them to say that,” Laidler said. “There’s still plenty of room for inflation in Canada to persist and to be hard to deal with.”

Canada isn't alone in playing catch-up according to Laidler, pointing to U.S. inflation over 9% putting Fed Chair Jerome Powell in an even worse position despite his 75bp hike last month.

Governor Tiff Macklem said Wednesday interest rates must go even higher to ensure inflation moves back to 2%, a target officials say won't be reached until late in 2024. He also said the risk of entrenched inflation means rates are more likely to rise a bit beyond the neutral range of 2%-3%.

“That’s a pretty optimistically low estimate of what the neutral rate is to begin with,” Laidler said. “Monetary policy is still pretty easy in Canada.”

GOOD DEFENSE NOT ENOUGH?

The half-dozen economists who updated forecasts in the hours after the bigger-than-expected hike on balance said the next move will be 50 or 75 basis points. Two said another 100bps is on the table.

Like others have told MNI, Laidler had some sympathy for central bankers grappling with an unusual economic cycle defined by Covid and war. That was layered with disappointment in officials ignoring centuries of history showing a jump in the money supply would drive up prices.

Wednesday's rate move and a potential recession afterwards will lead to more calls from Conservative lawmakers to fire Macklem, Laidler said. Those attacks trample on the Bank's history of inflation fighting and overlook legal protections for independent policy, he said. “I could mount a really good defense of the Bank of Canada and its independence,” he said, adding that may not work against populist politics.