MNI INTERVIEW:BOC Hike Is Precursor For More- Laval U's Gordon

(Story corrects Gordon's title in headline and first paragraph.)

The Bank of Canada's surprise interest-rate hike and a statement focused on underlying inflation dangers point to another likely move at the July 12 meeting, Laval University professor Stephen Gordon told MNI Wednesday.

The decision to hike before the next full forecast that will come alongside the July meeting is another indicator of heightened concern at the central bank, Gordon said. He spoke after the Bank raised its key rate a quarter point to the highest since 2001 at 4.75%, a move the majority of economists did not forecast.

"It looks like they decided that they are going to stay ahead of the curve, or they aren’t going to fall behind again,” Gordon said by phone from Quebec City. “We may see in July a new Monetary Policy Report arguing that the forces behind inflation have yet to come down, and we need to do more.” (See: MNI INTERVIEW:BOC Faces Sticky Inflation Fight-Research Winner)

The Bank remains in position to subdue inflation without the crackdown needed following the 1970s, Gordon said, even after officials paused hiking starting in March. Governor Tiff Macklem moved eight straight times including a 100bp shocker last July, and Gordon said the pause was "a reasonable decision" at the time to review the lagged effects of tightening.

ECONOMY IS SURPRISIGNLY TIGHT

Seeing heightened risk that inflation will stick well above target, Governor Macklem may also be inclined to remain hawkish because he only gets one more CPI report before July's decision, Gordon said. Inflation unexpectedly quickened in April for the first time in 10 months to 4.4% -- more than double the central bank's 2% target.

While officials still project inflation to slow to about 3% in coming months, much of that will result from past energy price declines rather than reflecting durable inflation relief, Gordon said. Output growth and the job market have also defied predictions from the Bank and private economists that a recession was a strong possibility this year.

There's no dominant explanation for Canada's springy economy but some of it could be consumers still flush with cash from pandemic relief checks, said Gordon, who was invited to speak at a BOC conference ahead of its last mandate renewal.

“Consumer demand is still very strong, people still want to get back into travelling, doing regular things again,” he said. “You’re not going to see a lot of slack in the labor market” either, he said. (See: MNI INTERVIEW: Canada Job Data Keep Defying Gloom-Govt Analyst)

KEEP EXPECTATIONS DOWN

Renewed action to keep inflation down is one of the most important things the Bank can do to demonstrate its commitment, even if that raises some political anger, Gordon said.

Finance Minister Chrystia Freeland took the rare step today of speaking to reporters just after the decision to say she respects the central bank's independence and understands higher interest rates are painful for many.

“The Bank is acting now, they know it’s very important to keep (inflation) expectations down," Gordon said. "One of the ways they can do it is by being extremely aggressive in saying we’re not here to stop recessions, we’re here to get inflation down.”