MNI INTERVIEW: BOC Can Move Far Once Rate Cuts Begin- Devlin
Strong job report makes June move less likely but inflation is trending the right way.
Canada needs to wait a bit to lower interest rates but will likely move farther than the market expects to blunt an economic slowdown according to Ed Devlin, an investor who has presented at central bank policy workshops.
Strength in the latest jobs report and the need to wrestle down inflation expectations make it less likely Governor Tiff Macklem will cut the 5% rate at the next meeting in June according to the founder of Devlin Capital and a former Pimco bond manager. Employment rose the fastest since the start of last year in April, though that gain lagged population growth fueled by immigration and kept the jobless rate a percentage point higher than a year ago.
“I would probably peg it more July than June, just because of the employment number we had,” Devlin said of a rate cut on MNI's FedSpeak podcast. “The employment number gives you pause for those who say Canada is already in a recession if you adjust for immigration.”
Macklem has said a cut to the highest rate since 2001 is within the realm of possibility at the June 5 decision. Officials are balancing the risk of being tight for too long against the need to be sure inflation gets all the way back to the 2% target, paying close attention to measures of trend inflation, wages and corporate pricing power. “Generically they have to be happy with it, in the sense that they’re trending lower," Devlin said.
"The question is with where we are right now, how sticky is it going to be?” he said. “Because the guy got bit by the inflation spike, he wants to make sure it’s properly dead and buried.” (See: MNI INTERVIEW: BOC Set To Start Cuts In June - Senator Gignac) Headline inflation has slowed back within the Bank's 1% to 3% band for three months now, the first time that's happened since the pandemic rebound. Core indexes tracked by the Bank have also slowed by remain around 3%.
IT WILL BE CLEAR
“The Bank will go a little bit later than the market thinks, and will go more than the market thinks, because by the time they are going, it will be clear,” Devlin said from Toronto. The Federal Reserve's recent shift away from signaling early cuts also means Canada's dollar will sag if Macklem moves too far ahead, he said.
Canada could lower the key rate to 3% or even towards 2% to make sure the economy retains momentum, Devlin said. Faster cuts make it more likely central banks will jolt economies enough to save firepower for any major slump down the road, he said.
The BOC faces dangers that will require monetary support, Devlin said, citing rising consumer and business credit delinquencies and the draw-down of pandemic savings. Governments also need to rein in fiscal policy, he said, and monetary stimulus may be blunted by increased government debts that put upward pressure on parts of the yield curve.
Finance Minister Chrystia Freeland's arguments about Canada's fiscal strength and how deficit spending will boost lagging productivity don't ring quite true, Devlin said. “It strikes me that they are more interested in redistributing wealth than creating wealth,” he said. (See: MNI INTERVIEW: Canada Budget Leans To Largesse - CFIB's Kelly)
On the other hand, Conservative Leader Pierre Poilievre's pledge to fire Macklem and impose a stricter inflation target represent "terrible policy," Devlin said. “Tiff has done a fine job given the relatively tough hand he was dealt” through the pandemic, Devlin said. “Politicizing the Bank of Canada by firing the Governor mid-term, I don’t know if the markets will roil, but they won’t like it.”