MNI INTERVIEW: BOC Keeping 2024 Policy Restrictive- CD Howe

Canada's central bank will keep interest rates well above neutral this year, even in the most optimistic scenario for lowering the highest borrowing costs in decades as inflation moderates, the head of a shadow policy council told MNI.

Bank of Canada Governor Tiff Macklem is likely to cut the 5% rate twice between March and July as the drag of his 10 rate hikes makes some progress cooling the housing market and prices of goods and services, Bill Robson of the CD Howe think tank said. None of the shadow policy council members said the Bank should cut over the next year into the 2%-3% range the central bank estimates for the neutral rate, and the median vote was for a 3.75% rate a year from now.

The Bank faces the risk inflation lingers above its 2% target but more importantly that quick or large rate cuts will hurt public credibility, Robson said. Where economists see ample evidence that GDP per capita is sinking and inflation outside of mortgage rates is being tamed, the public may only see a shift to looser policy while price gains still appear dangerously high, he added.

“That could create a problem with people just looking at the overall inflation number thinking the Bank’s caving,” Robson said, noting in Canada the public's inflation forecasts are often higher than what officials and investors see. (See: MNI: Canada Seen As Resilient To Rate Hikes- Finance Memo)

Members of the CD Howe group agree only on the idea interest rates will decline and there was divergence over how far and how fast, he said. The true inflation trend is being distorted by a 30% jump in mortgage rates boosting the Consumer Price Index while the cost of other goods and services is showing some weakness, he said.

Investors see the Bank keeping the key rate at 5% Wednesday and cutting between April and midyear. (See: MNI BOC WATCH: Macklem Core Focus To Clash With Rate Cut Hopes)

TIGHT SUPPLY

The fastest immigration in half a century also makes it harder to interpret consumer spending and economic growth that have likely been shrinking on a per capita basis for about a year now, he said. “They have engineered disinflation and the economy is much weaker,” Robson said.

Housing is another trouble spot among forecasters, especially after last year when there was a surge in demand after the Bank signaled a pause, which contributed to another two rate hikes around the middle of last year. “If you’re the Bank of Canada, it’s not doing what you would expect to see after the kind of interest-rate increase we’ve had,” Robson said.

Even after the Bank's rate hikes from near zero to 5%, mortgage lending is still growing about 3% from a year ago while total GDP stalled in the second half of last year. Lack of new housing supply has also kept prices rising and is one example Robson cited of supply-side issues giving the Bank less room to expect the economy can grow without inflation pressure.

Aggressive government hiring through a labor shortage and falling worker productivity also limits how much the Bank can cut, Robson said. Governor Macklem has said at times that fiscal and monetary policy are at risk of rowing in different directions. (See: MNI INTERVIEW:Spending Remains Too Hot For BOC-Ex Govt Adviser)

“The pressure of government on the supply side of the economy is material and helps to explain why inflation has been hard to bring down,” Robson said.