MNI INTERVIEW: BOC Hiking 50 Before Long Pause- Conference Bd

The Bank of Canada will raise its key interest rate a final half point Dec 7 and hold at 4.25% over the foreseeable future, Conference Board of Canada economist Pedro Antunes told MNI, with tight policy needed to keep inflation on a downward path in an economy he says will defy predictions of a painful recession.

Inflation will keep cooling as the lagged effect of the 350bps of hikes so far takes hold, said Antunes, a former economist in the BOC's domestic forecasting arm who advises lawmakers overseeing the central bank. While October's inflation rate was unchanged at 6.9% after fading from June's four-decade peak of 8.1%, Antunes joined other advisers in highlighting softer monthly data such as seasonally-adjusted prices excluding food and energy.

“Looking at the top line number on inflation right now, probably we will see another 50-basis-point increase in December and at the end of that maybe a pause to see how much impact this is going to have,” Antunes said. Economists surveyed by MNI are split on whether the next move is 50 or another step down to 25 from the Bank's moves of 100 in July, 75 in September and a smaller-than-expected 50 last month.

While some investors see the Bank cutting rates next year as the economy falls into recession, Antunes said firms are struggling to find workers and keep up with a burst of demand. Risks are tilted more towards big wage increases and the time needed for CPI inflation to come down, making the idea of rate cuts premature, he suggested.

HITTING A WALL

“We were essentially hitting a wall on our capacity, and that becomes inflationary,” Antunes said. “It’s not a typical recession in the sense that there’s some sort of imbalance in the economy where we lose confidence and people stop spending.”

Growth will stall in the near term but the latest job report, which surpassed all expectations, suggests there may not even be a technical recession with consecutive quarters of falling output, he said. “We have essentially a pause in economic growth, which I’m starting to wonder if we’ll really have, because of the employment numbers we just saw,” Antunes said.

Job-market strength makes calls from union leaders and the opposition NDP party to ease up on rate hikes misguided, Antunes said, pointing to an unemployment rate near a record low. (See: BOC Should Ease Up On Rate Hikes- Senator) “Inflation is kicking back up now, because the unemployment rate is potentially too low,” he said. “Talk to any employer out there, they’re desperate for workers.”

Wage gains have quickened to 5.6%, which Antunes said adds to sustained pricing momentum and could push rate cuts far down the road. The Bank must ensure it wins the inflation fight now because another big tightening in 2023 could trigger a real recession in 2024 with steep losses in output and jobs, he said.

The Bank of Canada predicts inflation won't reach 3% until the end of next year and 2% until the end of 2024. “When we get back into that two to three percent range for inflation, I think that’s when we’re going to start to see the Bank ease up on interest rates or lower interest rates,” Antunes said.

Source: Statistics Canada