MNI INTERVIEW: BOC Path Tied To Core Prices- Laurier's Siklos

The Bank of Canada's deliberations on whether to hike interest rates an 11th time in this cycle rest heavily on the path of core inflation in the next few months, Wilfrid Laurier University economics professor Pierre Siklos told MNI.

Inflation remains elevated even with growth stalling, Siklos said, adding that he doubts higher global bond yields can substitute for further monetary policy action if needed. Headline and core inflation remain almost double the Bank's 2% target even with Statistics Canada's report Tuesday that GDP shrank at a 0.1% annualized pace in Q3 following a prior 0.2% decline.

“They can get away with holding pat, because they are going to argue that it takes a while for the impact of higher interest rates to move itself through,” said Siklos, who's presented at Bank conferences on communication and inflation target renewal and recently ended a long term on the CD Howe Institute's shadow monetary council. “If by the end of the year core inflation is still too high," he said, "they are going to have to seriously consider tightening.”

Governor Tiff Macklem last week held rates at 5%, the highest since 2001, cutting growth forecasts while saying price risks have risen and that it will take until 2025 to restore inflation to target. Most investors predict the Bank has finished its hiking cycle and see a rate cut around the middle of next year, though some former officials see risks of further tightening. (See MNI INTERVIEW: No BOC Cuts In View, More Hikes Possible-Tapp; MNI INTERVIEW: BOC Could Hike Once Or Twice More, Dodge Says)

“I don’t think there’s that much tightening left, because they are also scared about triggering a recession simply by tightening some more and leading to a loss of confidence in the economy,” Siklos said. Even economists who were until recently calling for the Bank to go further only saw another quarter-point hike to 5.25%.

DOING THE WORK?

With more investors seeing the Bank on hold, yields on five-year Canada government bonds slipped to 4.12% this week from 4.45% a month ago, though still well above the 3% mark recorded six months ago.

Macklem told reporters before the last decision that higher bond yields are no substitute for any needed policy action, though the Bank said in its subsequent monetary policy announcement that they were weighing on global demand.

“I find that argument about the bond market doing the work for the Bank, or the central bank, a bit strange,” Siklos said. “If that’s the case, then the central bank must be signaling something to markets that the public doesn’t quite see.”

The BOC is also getting caught between the inflation battle and finance ministers grumbling about high interest rates as they continue deficit spending. The governor underlined to a House of Commons committee Monday the Bank's primary concern is price stability and faster spending makes his job harder.

PRODUCTIVITY ISSUES

“No one wants to see” that kind of a “fight” between fiscal and monetary policy, Siklos said. “It has happened before, so it’s not out of the realm of possibility, and it can happen again.”

Elevated government debts feed into the bigger question of whether the global economy returns to the "secular stagnation" that was a concern before Covid, Siklos said. Other experts have suggested neutral rates will rise, with inflation frictions worsened by government debts, retiring Baby Boomers and fraying of global trade.

"There are some who believe that we’re just going back to secular stagnation that we had before the pandemic, so that means low growth,” Siklos said. “But inflation still remains elevated.”

Canada’s vulnerability has been increased by a long spell of dismal worker productivity, he said, noting that with immigration at record levels reports of skilled arrivals forced into jobs well below their qualifications have become commonplace.

“Ultimately what Canada faces is a productivity issue,” Siklos said.