MNI INTERVIEW: BOC Heading To Restrictive Policy-Ex Researcher

The Bank of Canada is clearly taking monetary policy into restrictive territory to bring inflation back to target, a top outside research adviser told MNI, while also arguing it's unfair to attack policymakers for a slow pivot away from stimulus that was vital when Covid struck.

“This is going to involve some restrictive monetary policy,” said Francisco Ruge-Murcia, who in 2017 won a five-year Fellowship award from the Bank and teaches at McGill University. “The Bank has been very clear in signaling that.”

Investors are less sure where rates are going. Markets see the Bank making a third straight 50bp hike to 2% at its July 13 meeting, with some chance it will raise by 75bps, and there's much less conviction of what happens afterwards.

The BOC said last week it's now more likely to lift rates beyond an estimated neutral range of 2% to 3%, with Deputy Paul Beaudry telling reporters its willingness to be forceful could mean faster hikes or a higher terminal rate. Even with that nudge market economists have wide-ranging views of the terminal rate, from 2.25% to 3.5%.

Former Governors David Dodge and Stephen Poloz have said rates must get to neutral to keep a lid on inflation and more importantly make sure public expectations don't get out of control.

A LITTLE BIT CHEAP

The Bank should be applauded rather than blamed for quickly rolling out stimulus during the Covid pandemic, and its critics are claiming a kind of foresight they weren't showing at the end of last year, Ruge-Murcia suggested. The Bank didn't start hiking until March and in December investors were reluctant to pencil in rate hikes amid the omicron wave that overwhelmed many hospitals.

“There is something maybe a little bit cheap about saying OK, now six months later we know what you should have done,” he said. “This is something that happens once in a blue moon, there is no manual that you can turn to,” he said.

“In the case of Canada, I’m really impressed by how quickly they were able to react," he said. “Both fiscal policy in organizing transfers” he said “and the Bank as well, in terms of launching new programs.”

Governor Tiff Macklem in the depths of the pandemic also gave guidance to hold a record low 0.25%, at one point saying the conditions might not be in place until the second half of 2022. It's unclear whether forward guidance was very effective, Ruge-Murcia said.

"It’s very difficult (to assess) in the sense that there’s all these other things happening” at the same time, he said. “It probably was helpful at some point and in some way, but how effective” is a more open question.

DRIVE FOR CONSENSUS

More broadly, central banks are moving at different paces of tightening because of shocks unique to each region, said Ruge-Murcia, who has also done research for the Minneapolis Fed, the Bank of France and the IMF.

“Clearly the situation in Europe because of the war in Ukraine is quite different than the one in the U.S., even though inflation is rising in both places," he said. "The future doesn’t look the same.”

Ruge-Murcia spoke in an interview Friday at the Canadian Economics Association conference, where as President he later presented a lecture arguing the Bank's decision-making isn't dominated by the Governor or the "median voter," but rather by the consensus policymakers say is behind their decisions. Investors sometimes wonder about that because the BOC doesn't publish minutes and the legislation that created the Bank names only the Governor as responsible for policy.