MNI INTERVIEW: BOC Cuts Will Be More Hesitant- WLU Researcher

MNI ((MNI) OTTAWA) - MNI (OTTAWA) - The Bank of Canada will ease policy only cautiously, and could skip a meeting at some point in its new cycle of interest-rate cuts, according to a researcher whose model of inflation persistence correctly predicted aggressive tightening as prices surged after pandemic lockdowns. 

Christos Shiamptanis of Wilfrid Laurier University told MNI that while based on his estimates the Bank would have been justified in cutting borrowing costs three months ahead of its opening 25-basis-point moves in June and July, policy is now correctly calibrated given the inflation outlook. Official projections from the July decision point to an uneven inflation unwind, with CPI settling at the 2% target sometime next year.

Governor Tiff Macklem's references to inflation bumps also suggest potential for a meeting that skips cutting along the way, Shiamptanis said in an interview. 

“I don’t expect rates to come down fast at all, I expect them to come down gradually,” he said. He and his colleague at Laurier, Ke Pang, developed a model based on internal projections by the central bank made available with a multiple-year lag, and shows the BOC tends to respond more to lasting deviations from the inflation target. Some of that thinking suggests without some more recent signs of weakness a rate pause in September could be justified, he said.

That view is more cautious than many economists who in recent weeks shifted to see cuts at all three of the Bank's remaining 2024 meetings, with some investors talking of a 50bp move. Macklem said in July more cuts are justified if inflation keeps moderating and a report Tuesday showed CPI fading to 2.5%, the slowest in more than three years. Investors are also playing up signs of stalled hiring and the potential for Q3 growth to come in below the Bank's estimate. (See: MNI INTERVIEW: BOC To Keep Cutting As Far As 3%- Ex Staffer)

“They don’t want to go down the road where they are lowering the interest rate too quickly, because you will bring inflation again,” Shiamptanis said. “I expect the cuts to happen slow, and I do not expect the rate to return to the levels that we have seen.”

CLAIMING A WIN

Macklem has also said the policy interest rate, now at 4.5%, probably will not return to the levels below 2% seen before the pandemic, though he has steered away from any suggestion that he may aim for a neutral rate the Bank estimates at 2.75%. Shiamptanis agrees with the Bank's assessment there is some risk inflation will slip below 2% in the near term, and said officials may indeed overlook some short-term setbacks such as a blip in energy prices.

 “Those I think they would -- I don’t want to say dismiss -- but they would put less weight on them,” he said. (See MNI INTERVIEW: Canada Could Hike To 4.75%-WLU Researchers)

While inflation has been above target for three years, price and wage expectations held somewhat in place as workers and employers reasoned that the 8% inflation peak would not last, and Shiamptanis said the prospects for persistently high inflation appear to be fading.

Outside influences on monetary conditions that drove up inflation remain a potential danger, he said, citing a volatile global economy, geopolitical tensions and loose fiscal policy. Officials who are now working on a report reviewing their pandemic-era policies can still claim "a win”, because their models were more accurate than other ones Shiamptanis examined.

After criticism for a slow reaction to inflation surging, “this time around I think they are going to be more careful,” as they cut, he said. “But I don’t think we are going to have a shock right now that is going to be more persistent.”