MNI INTERVIEW:BOC Seen Holding All Yr, Cut Is Long Shot-Gignac

The Bank of Canada is likely to hold interest rates for the rest of this year and instead of the cut some investors have backed the more likely deviation is a ninth hike, Senate banking committee member and former BOC and finance department adviser Clement Gignac told MNI.

Bets on a rate cut are a "long shot," Clement said in an interview after putting questions to Governor Tiff Macklem at a hearing Thursday. Upside inflation pressures are more important and with unemployment around record lows there's little chance of a severe recession requiring fresh stimulus, he said.

“I still believe that we will be on pause, on the sidelines, for a while,” he said, later adding that could mean for the rest of this year. “I give a low probably to further rate hikes in Canada, contrary to the U.S.”

The BOC held rates for a second meeting at 4.5% on April 12, following eight straight increases to the highest since 2007.

Macklem has said a cut isn't on the horizon and instead he's prepared to hike again if inflation doesn't move all the way back to the 2% target. But overnight index swaps currently imply a reduction to around 4.24% by December.

HAWKISH DETERMINATION

“It’s on purpose that they mention a hawkish determination about 2%,” Gignac said. “They don’t want to fuel any rate-cut expectations, they have no interest in doing that.”

Macklem can hold rates even if the Fed hikes a half-point or so further because Canada's dollar has recently been less vulnerable to any negative carry so there's less chance of importing inflation, Gignac said. Canada is also more sensitive to the eight hikes already delivered because Canadians often have five-year instead of 30-year mortgages, Clement said.

“The dollar won’t be a significant factor in the vision of the Bank of Canada,” Clement said. “Some people start to realize that maybe Canada will be resilient, a well capitalized banking system, low public debt as a percentage of GDP. Maybe this link between the Canadian dollar, the U.S. interest rate, is weakening.”

Inflation remains a big obstacle to rate cuts with wages bubbling up, Clement said. But on the other hand the lagged effect of past rate hikes especially on indebted consumers helps to keep further hikes at bay, he said.

Canada's financial system remains solid after the collapse of Silicon Valley Bank according to Gignac, who worked with Macklem around the 2008 global crisis, from which the country's major banks emerged with little damage. (See: MNI INTERVIEW: BOC Pause Case Boosted By SVB Collapse: Antunes)

Recent gains in prices of some of Canada's commodity exports like gold have climbed lately, and so have the country's bank stocks, signs of global market confidence, Gignac said.

“Rate cuts, it’s a long shot,” he said.

It would require a “collapse” in job openings and a jump in unemployment before that idea comes into the picture, he said. Even rising unemployment and weak growth would not necessarily be equivalent to a traditional recession given the labor market's current historic strength, he said.

Any downturn would be better described as a "contraction" than a "recession," he said. “If it’s more a stagnation, no recession but stagnation, I think that rate cuts are out of the picture.”