Hiking to neutral seems insufficient for the BOC given inflation pressures, the shadow monetary council's Steve Ambler tells MNI .
The Bank of Canada needs to do more to control inflation and could even find itself obliged to hike by 75 basis points on June 1 followed by more tightening to above the neutral rate, former BOC adviser Steve Ambler told MNI.
Increases of 25bps in March and 50bps in April lag this year's inflation jump, meaning real rates have turned even more negative and signaling the central bank is further behind in a quest to pull demand back in line with supply, Ambler said. Inflation has climbed 1.6 percentage points this year to 6.7%, the fastest since the Bank adopted inflation targets in 1991, and has topped the 2% target for over a year.
Governor Tiff Macklem raising the 1% overnight rate by 50bps at the next meeting “is pretty much guaranteed and at this point I wouldn’t even be shocked to see a 75-basis-point increase," said Ambler, who also helps lead the C.D. Howe think tank's shadow monetary policy council.
“Real rates are actually becoming more and more negative, which if you’re trying to fight inflation by reducing demand, having real interest rates that are more and more negative is not going to get it for you,” Ambler said.
The Bank says the neutral rate ranges from 2% to 3% and policy makers say they "are not on autopilot" and could pause as they get into that range or move beyond depending how the economy evolves. (See MNI INTERVIEW: BOC Must Reach Neutral Rate Fast- Fmr Gov Dodge)
“They were thinking that interest rates may have to go above the neutral level; to me that seems to be an incredibly mild statement at this point,” Ambler said.
Positive real rates are all but a necessity now, he said, and the prospect of inflation expectations rising further is a concern. “That’s going to make it harder for the Bank to get inflation down, it’s probably going to mean that the overnight rate is going to have to increase more than the Bank is expecting,” Ambler said.
Based on the Bank's own surveys, Ambler said, “what it looks like is that consumers or households are expecting that the Bank isn’t going to be able to get inflation back down to target in the next two years, which is a bit worrying.”
At this point, sticking with a half-point increase at the June meeting is more likely because moving faster might look panicky and "that could have a perverse effect on expectations,” he said.
Ambler's views are more hawkish than consensus. Just a handful of market economists see a 75bp hike as an outside possibility for June, after Macklem said that the 50bp move was already unusual. Some of Canada's biggest commercial banks also see rate hikes halting at or below neutral this year as indebted consumers feel the added squeeze of higher mortgage rates.
“Managing (inflation) expectations at this point is more important,” than worries about a hard landing, Ambler said. “I’m hoping that we can get out of this without a full-blown recession, but we will see.”