MNI INTERVIEW: BOC Pausing Soon To Assess Lags- Ex-Adviser
Inflation is showing signs of peaking in Canada, Thorsten Koeppl says on FedSpeak podcast.
The Bank of Canada will pause interest-rate hikes early next year to assess the drag from past tightening, academic and former BOC adviser Thorsten Koeppl told MNI.
“We see the first signs that some cooling is taking place," said Koeppl, an economics professor at Queen's University in Kingston, Ontario, who has also done research for the ECB, the New York Fed and the RBNZ. “If I were in the shoes of the Bank of Canada, I think I would be less aggressive.”
Retail sales are fading and inflation is stubborn but has likely peaked, he said on MNI's FedSpeak podcast. Consumer spending will also come under pressure as more variable-rate and five-year fixed mortgage holders reset at much higher cost, he said.
Most economists see the Bank slowing to a 25bps hike at the Dec. 7 meeting after Governor Tiff Macklem went with a less-than-expected half-point in October, though a large minority of analysts see another half-point move. After hiking 100bps in July and 75bps in September, Macklem has said the end of the tightening cycle that began at 0.25% in March is nearing.
“The Bank will be well advised to take a breather, a couple of months from now, maybe after the first quarter of 2023,” Koeppl said. “If more measures are necessary, I think they can always react.”
MANAGING QE LOSSES
While October's inflation rate was unchanged at 6.9% after fading from June's four-decade peak of 8.1%, former Bank advisers highlighted softer monthly data for items such as seasonally-adjusted prices excluding food and energy. (See: MNI INTERVIEW: Steady CPI Dents 50BP BOC Hike Case- Ex Adviser)
With the Bank about to show losses on interest payments related to QE, the government should allow it to create a deferred asset to balance its books, Koeppl said. That would help avoid perceptions that monetary policy is being conducted to avoid passing losses onto the government's books, he said.
The Bank of Canada already has an indemnity on the face value of the bonds but not the interest flows. While active bond sales remain an option, such a move could rattle financial markets, Koeppl said.
Governor Tiff Macklem told lawmakers Wednesday that with hindsight QE should have been pulled back sooner and he pledged a review of policy tools when the 2% inflation goal is restored.
"We may have overburdened monetary policy" by asking it to rescue the economy in every crisis, Koeppl said. "It doesn't have to be a superhero."