Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.
The Bank of Canada will raise its record low 0.25% policy interest rate next week against compelling evidence inflation and price expectations have gone too far, Scotiabank chief economist Jean-Francois Perrault, a former deputy finance minister and central bank official, told MNI Wednesday.
The central bank's own survey published Monday showing a record 67% share of firms expecting CPI topping the Bank's 1%-3% target band over the next two years and Wednesday's report of the fastest inflation since 1991 mean a course correction on monetary policy is needed, Perrault said by phone. The Bank will also hike by 25 basis points in March and by half a point in April, when the ebbing of the pandemic should allow more confidence for monetary tightening, Perrault said.
Total hikes of 175bps this year would still leave a negative real policy rate, he said.
“There are clearly signs of inflation pressures on the system,” said Perrault, former assistant chief at the BOC's domestic analysis branch and assistant deputy minister until 2015 "I don't think they have the luxury of waiting that through now."
Governor Tiff Macklem last month said conditions for a rate increase-- using up economic slack and inflation sustainably at 2%-- weren't seen being in place until the "middle quarters" of this year. Other investors and some economists in recent weeks have also called for a move at the Jan. 26 meeting, though some still see scope to wait until March or April amid the most infectious Covid wave yet.
OUTPUT GAP IRRELEVANT NOW
“I don’t think it matters anymore” on the output gap condition, Perrault said. “It comes down to inflation: with inflation as high as it is, it doesn’t matter when the output gap closes anymore.”
Canada's GDP will still post modest growth of 0.4% annualized in the first quarter even as Omicron triggers new business restrictions, Perrault said. More importantly the wave will likely add to supply chain problems and exacerbate price gains. Output will also likely catch up somewhat in the second quarter, he predicts.
Even if Governor Macklem is swayed by downside Omicron risks, he will at a minimum raise inflation forecasts again and drop forward guidance to clear the way for a March hike, Perrault said. “They still have a lot of ground to make up. Real policy rates are deeply negative,” he said.
The required shift reflects the sudden extra burst of inflation in recent months, Perrault said. “Had they changed interest rates last summer, we would have all thought they were nuts,” he said. “The challenge is simply they were slow to modify their guidance given what is clearly a very dynamic situation on the inflation front.”
Source: Statistics Canada
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.