MNI INTERVIEW: BOC Can Go Slow On Rate Hikes- Conference Board

The Bank of Canada will go slow on tightening with three rate hikes this year because of indebted consumers and weakness from Omicron, and because service companies will ramp up supply as the economy reopens, Conference Board chief economist Pedro Antunes told MNI.

Energy prices will moderate around mid-year as global supplies increase, and that could also happen for some food products, said Antunes, who has advised lawmakers overseeing the central bank. Then inflation will move back towards policymakers' 2% target in 2023 as consumers shift spending from overburdened goods makers to service firms, he said.

The global nature of inflation suggests limited gains from robust Bank of Canada action, while there are dangers to the domestic economy from a rate shock to consumers, Antunes said. Canada has become one of the world's tightest housing markets and there's a generation of heavily-indebted families who have never seen rates climb significantly.

“Three rate hikes, given that we’re so addicted now to very low rates and we’re so indebted, especially households in Canada, it wouldn’t take much in terms of rate increases to start having that disinflationary impact on the economy,” Antunes said.

Governor Tiff Macklem can delay hiking until April, Antunes said, running against a majority of economists who see a lift to the record low 0.25% benchmark at the next meeting in March. The January meeting was divisive, with markets betting heavily on hike while a slim majority of economists correctly predicted no move. Macklem said last month that he was shifting to a path of tightening and will move in deliberate steps.

LONGER TERM PRESSURES

“The Bank of Canada wants to be careful in their monetary policy, in their tightening. Certainly the economy has come bouncing back, but it's not really fully back to normal,” Antunes said. “When we reopen the economy, in a way, that might actually take away from inflationary pressures in some areas.”

Governments are also scaling back relief checks that boosted household savings last year, which could dent consumer demand, Antunes said.

The BOC could move faster should wage demands build or inflation expectations become entrenched, he said. “The big concern, given the tight labor market, is whether inflation expectations get de-anchored and like I said, I think there's a lot of risk of that. But right now, we don't have that in our baseline forecast.”

Over a longer period, policymakers looking at inflation pressures must assess why low interest rates drive up consumer spending but not business investment, he said. Weaker investment curbs how much the economy can produce before inflation picks up, and Governor Macklem speaks later Wednesday on "the role of productivity in fostering non-inflationary growth."

“What we've seen with monetary policy is that they cite a lot of impact on consumer indebtedness and consumer borrowing," Antunes said. "But you might argue that we weren't as successful in terms of being able to drive stronger business investment through this cycle. In fact that’s part of the issue that we’re concerned about.”