Former Governor's view on inflation fight is more hawkish than many investors.
Former Bank of Canada Governor David Dodge told MNI the policy interest rate could climb another percentage point to 4.25% over the next two meetings before a pause to assess the risk of overshooting, a view that's more hawkish than most investors.
“If they get up to four, four and a quarter, something like that, in either the next or the next two (meetings), they won’t yet have enough evidence of what’s happening,” to go even further, Dodge said. “You don’t want to overshoot, because the impact of that overshoot will be felt quite a bit down the line. It’s a delicate balancing act.” (See: MNI INTERVIEW: Canada Overdoing Rate Hikes- Ex BOC Scholar)
While most economists see a 50bp increase at the next meeting in October, the consensus for December is for either for a pause or a quarter-point hike. The Bank began hiking from a record low 0.25% in March and moves of 100bp in July and 75bps on Sept. 7 pushed it to the head of the G7 pack for tightening.
Lifting the current 3.25% overnight benchmark to 4% or a bit further should generate a real interest rate that’s at least zero or slightly positive, Dodge said. “It’s kind of hard to think that you’re going to deal with this episode without at some point having a positive interest rate, as measured by current inflation.”
Canada's errors reacting to surging inflation were smaller than the Federal Reserve's, Dodge said, meaning officials in Ottawa don't have to talk as tough about hiking towards 5% to get things in line. (See: MNI INTERVIEW: Fed Needs To Hike To At Least 5%- Bordo)
STAYING NIMBLE AND HUMBLE
The BOC must stay nimble and humble with the economy still vulnerable to `tail risks' from new Covid or Ukraine war shocks, Dodge said. “The right words are: ‘Our actions are going to be data dependent.'”
Dodge spoke to MNI Thursday after a Senate hearing where he said the economy will likely stall out over the next year, declining to call that a recession. Other commercial banks like RBC and Desjardins predict rate hikes will trigger a mild recession as indebted consumers pull back on purchases of homes and other goods and services.
Current BOC officials said after the last two inflation reports they are nowhere near done in the quest to restore price gains to the target of 2%. While headline inflation slowed to 7% from a four-decade high of 8.1% over the last two months, core rates of inflation remain close to record highs around 5%.
“They are working to suppress demand to the extent that they can, but it takes time,” Dodge said. “The Bank will be looking for, next spring, whether domestically generated inflation is moving down in a potentially sustainable way.”
What makes the current bout of inflation trickier to manage is the shock to oil prices, he said. “This is going back much more to the 70s, which was a supply problem.”