MNI INTERVIEW: Canada Overdoing Rate Hikes- Ex BOC Scholar

The Bank of Canada is overdoing interest-rate hikes as inflation slows in an economy at risk of recession, but policymakers are showing little indication of changing course, former BOC visiting scholar Stephen Williamson told MNI.

The speed of the 300bp rise to 3.25% could prove just as jarring to the economy as its magnitude, as borrowers used to low rates have had little time to adjust, said Williamson, who has also been a researcher with the Federal Reserve. Inflation has begun slowing and could moderate to around 2% well ahead of the Bank's forecast for the end of 2024, he said.

“I’d be inclined to say they are being too aggressive,” the Western University professor said in an interview following the Bank's 75bp hike on Wednesday and a top deputy's speech Thursday stressing it will take a while to bring inflation down.

“There was nothing in the language to suggest any backing off," at the next meeting, he said. “Another 75 basis points would surprise me, given the way they are talking, but 50 wouldn’t surprise me.”

STEAMING INTO TROUBLE

“I would have hoped that this time they would have used more strong language that maybe we’ve gone far enough,” he said. “It’s like full steam ahead; that I find troubling.”

The rate decision and speech picked apart data to support the idea inflation remains very dangerous, he said. “They are looking for reasons to continue hiking,” he said. “Anything that sounds certain from them, you should take with a grain of salt, nobody should be certain about anything at this point.”

Comments by Senior Deputy Carolyn Rogers about a two-year lag in monetary policy were also noteworthy in signaling tight policy, he said. “If it takes two years for monetary policy to have its effects, why do you want to keep hiking interest rates? You already went up 300 basis points, why wouldn’t you stop and wait and see what happens?” The current 3.25% overnight benchmark is already above the Bank's estimates of a neutral rate between 2% and 3%, he observed.

The Bank has been making up for lost time with hikes of 100bps in July and 75bps last week, since the first quarter-point hike in March, with other observers arguing that the risk of persistent inflation justifies tough action. (See: MNI INTERVIEW: Canada Could Hike To 4.75%-WLU Researchers) Investors are betting rates will top out in the next few months at around 4% after the Bank argued its 100bp move was front-loading to avoid more pain later.

Canada's economy grew at about a 3% annualized pace in Q2 while the rest of the G7 showed more of a tilt towards recession. Bank officials are still talking about a narrow path to restoring 2% inflation without recession but the prospect of further outsized hikes makes that less likely, Williamson suggested.

GETTING BLAMED ANYWAY

“It’s still possible that inflation just goes away on its own, you don’t have to go through this darn recession,” Williamson said, adding now is the wrong time to rely on forecasts that failed to capture how fast prices would rise.

"Are you going to trust anybody’s inflation forecast now?" he asked. "A year ago, everybody was wrong: the private forecasters, the central banks.”

While Canada often tracks year-over-year inflation, the month-by-month figures are a better guide at this point, Williamson said. The latest data showing seasonally-adjusted prices rose 0.3% still amounts to topping the Bank's 2% annual target but was still good news, he said.

“It still might be true that it goes away on its own, it’s transitory, just less transitory than they thought at first,” he said. Officials could have given a more data-dependent message to convey this kind of scenario, he said, or used stronger language about taking a meeting-by-meeting approach.

The Bank has done well so far with public messaging given the upheaval related to the pandemic, but any recession will be more damaging than whatever they are saying or doing now to avoid a downturn, Williamson said. “It’s not like they aren’t saying anything,” about a potential slump, he said. “They are going to get blamed anyway.”