MNI INTERVIEW: BOC Needs Hawkish Footing - Ex Deputy Minister
Inflation expectations must be brought back into line, Tim Sargent says.
Canada's central bank will remain focused on upside inflation risks so it is dangerous for investors to assume Governor Tiff Macklem is done hiking, former deputy finance minister Tim Sargent told MNI.
“I don’t think the Bank can give them that certainty, and I don’t think the Bank ought to,” Sargent said Tuesday at the Canadian Association for Business Economics conference in Kingston, Ontario. “Is the Bank done? I think you can see why the governor doesn’t want to give hostages to fortune.”
The Bank of Canada held its overnight rate at the highest since 2001 at 5% this month following increases at the prior two meetings. Many investors bet the cycle is done after 10 moves and a main reason Macklem didn't signal he could be done -- like he did early this year -- is to avoid a bond market rally that loosens financial conditions.
“I just see quite a lot of uncertainty about the extent to which inflation is actually going to come down," Sargent said. "When you see uncertainty and you’re risk averse, and you’re prudent, which is I think what we want central banks to be, you’re going to err on the side of doing a bit more to give yourself a little bit of insurance.” (See: MNI INTERVIEW: Canada Seen Hiking At Least 50BP More-WLU Prof)
SERIOUSLY UN-ANCHORED EXPECTATIONS
While agreeing with the Bank's view there are two-sided policy risks, Sargent said officials are worried about inflation expectations. CPI has been above the Bank's 2% target for two years and the BOC says it won't come back in line until mid-2025, while its own surveys show executives and households don't see inflation returning to balance.
“There’s no question that inflation expectations have become seriously un-anchored, and that is the worst thing for a central banker,” he said. “The public very much does not have 2% in its mind right now,” he said, pointing to jumps in high-profile items like groceries, mortgage rates and gas.
Inflation quickened to 3.3% from 2.8% in Statistics Canada's latest report with grocery costs still climbing at close to a double-digit pace. Bank of Montreal economists say inflation may quicken in coming months with gasoline prices climbing again.
“The headline rate understates the impact on people’s psychology on the current inflation rate, and so that’s significant upside risk for the Bank of Canada,” said Sargent, who is working with the Centre for the Study of Living Standards and while in government also served as an economic adviser in the prime minister’s office.
The BOC is accountable to Parliament through the finance minister, who works in tandem with the prime minister on economic policy.
PUTTING HUMPTY BACK TOGETHER
Noting recent calls for the Bank to raise its 2% inflation target to 3%, Sargent said the government won't make changes to its five-year agreement with the BOC on the fly. That would damage the authorities’ credibility, he said, while changing the mandate wouldn’t deflect voter punishment for a bad economy. (See: MNI INTERVIEW:Trudeau Pushes BOC To High-For-Long Rate-Asselin)
“The only way to put Humpty Dumpty back together again is to get convincingly back down to two,” he said, though he added: “If inflation gets back to two but we have a recession and 8% unemployment, that’s going to be cold comfort.”
Some economists say Canada faces a longer-term jobs challenge with productivity falling behind that of the U.S. There has been a longer decline back to the 1970s, Sargent said, adding that productivity has also slipped across major economies.
The problem reflects difficulty measuring digital technology gains and Canada’s natural resources becoming harder to tap over time, Sargent said. Jacking up worker efficiency often requires bigger upheavals than provided by government policies, he said, noting gains around historic shifts away from farming and manufacturing. “It’s really hard to move those productivity numbers,” he said. “If you want to boost productivity, you have to really move people around.”