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Canadian inflation will likely quicken further in the near term, complicating the central bank's message about hiking interest rates to a public that hasn’t faced such big price gains in decades, a top monetary policy researcher told MNI.
Governor Tiff Macklem must balance a resolve to restore 2% inflation against the dangers of spooking consumer confidence or fostering a recession according to Michelle Alexopoulos. The University of Toronto professor and BOC Fellowship Award winner is working with staff economists on using facial and voice recognition to track market reactions to Fed speeches.
Unexpected, unpredictable and global shocks are Canada's major problem today including China’s Covid lockdowns, choked supply chains and especially the Ukraine war. “That’s why I think we’re going to see a bit of a ramp-up before things subside,” on inflation, she said.
AVOID UNEXPECTED RATE JUMPS
Inflation should partly unwind as shipping terminals unclog and the impact of past rate hikes work their way through the system, Alexopoulos said. The economy's momentum also gives leeway against a slump though the supply-side disruptions complicate things, she said.
“I’m not sure we’re at the point yet where people are completely freaked out," she said. "I think so long as the communication is there and people do understand that a large portion of what we’re seeing right now has to do with disruptions that we’re really hoping will subside over the next little while" then things can return to normal.
The Bank's message about raising rates to neutral or beyond should resonate with the public, she said. Policymakers hiked 50bps to 1.5% earlier this month and put neutral in a range of 2% to 3%. Deputy Paul Beaudry also recently suggested a 75bp hike is possible at the July 13 meeting.
“They don’t want large unexpected jumps, they prefer to give some signaling,” Alexopoulos said. “They aren’t trying to shock people.”
DON'T MIX RATES WITH POLITICS
Consumer prices rose the fastest since 1991, when the BOC introduced inflation targets, with a 6.8% rise in April. Statistics Canada is also introducing a better measure of used car prices in the next report on June 22, a factor the agency said would have lifted prices 0.2pp earlier this year.
“Given that the Bank of Canada and the Federal Reserve do have a lot of historical reputation," she said, "it gives things a chance to sort of work through.”
Alexopoulos said it would be wrong for any government to heed Conservative leadership candidate Pierre Poilievre's pledge to fire Governor Macklem. That's a move the current Liberal government rejects.
"I would say the same thing to the Liberals, the Conservatives, the NDP, anybody who got into power, you want to maintain that separation from politics between a central bank and an elected government,” she said. “Sometimes elected officials aren’t going to be happy with what happens at the central bank, but inflation is the combination of a lot of things."
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