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MNI INTERVIEW: BOC Mini Cycle May Pause At 1%- Ex Staffer

MNI (Ottawa)

Governor Macklem may follow pattern set after 2008 and 2015 downturns.

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The Bank of Canada will raise rates three times to 1% by July then pause until yearend to assess if indebted consumers can handle further stress and inflation expectations are under control, former central bank and finance department economist Charles St-Arnaud told MNI.

Hikes in April, June and July would mirror cycles to 1% following downturns around 2008 and 2015, he said. There's little chance Governor Tiff Macklem will drop forward guidance at the Jan. 26 meeting for a move as soon as April because markets would read that as a guaranteed hike in March, taking away flexibility as policymakers stare down a record-breaking fifth wave of Covid.

“We might be talking about a reduction in stimulus, but not as much as the market has been pricing in,” he said. “The Bank of Canada is really working on a very fine line here, and the idea of hiking rates isn’t necessarily to fight inflation that we are seeing right now, it’s to send a strong signal to both businesses and consumers, do not bank on high inflation, keep your expectations in check.”

Following that more rapid pace move to 1% the BOC could switch to hiking every three to six months based on the economy's progress, he said. While investors are betting on much faster increases than economists like St-Arnaud, there is more agreement on the idea that the overall cycle will be modest. Bankers' Acceptance trading shows that 200bps of tightening is unlikely even two years from now.


The Bank has appeared to see the 1% rate as a weigh station in the past. It hiked in July and September of 2017 to 1% and said “future monetary policy decisions are not predetermined,” pausing at the next few meetings before tightening in January 2018 as things improved. Three hikes in 2010 to 1% ended with a warning that further moves “would need to be carefully considered” and the rate was frozen until a 2015 cut.

Patience this time ensures the BOC doesn't overdo the fight against global price increases and supply bottlenecks Canada has little control over, St-Arnaud said. Surging oil prices are also providing some offsetting income gains to regions like Alberta where St-Arnaud is based.

“Unless commodity prices continue to increase, inflation is bound to moderate, at least that part,” he said. “Hiking rates doesn’t make it suddenly that we have more cars at the dealer’s lot."

Moving too fast could hurt demand and force the Bank to cut rates next year, he said. Along with the near-term risks omicron will disrupt the recovery early this year, ballooning consumer debt means "every hike will have a disproportionate impact," St-Arnaud said.

“One percent, you basically remove the emergency setting, and you brought it back to still very accommodative but no longer emergency” posture, he said.