MNI INTERVIEW: BOC Seen Holding Rate to 2023, Mirroring Fed

The Bank of Canada may hold its key lending rate at 0.25% beyond its guidance for a hike in the second half of next year, mirroring the Fed's challenge in restoring growth led by the private sector, the Ontario finance department's former forecasting manager Tony Stillo told MNI.

More patience would also avoid any unwelcome surge in the Canadian dollar that could occur if Governor Tiff Macklem moved before the Fed, according to Stillo, Canada director at Oxford Economics. The BOC will advance further on tapering of QE, from today's pace of CAD3 billion a week CAD2 billion at the next meeting in July and to CAD1 billion by yearend, he predicts, a path made easier with Chair Jerome Powell opening discussion of scaling back asset purchases.

Comments from the BOC this year about a more diverse employment recovery is another sign the road to rate increases stretches into early 2023 and more in tandem with the U.S., Stillo said. While output and jobs may be restored in the second half of the year in Canada, the economy faces chronic dangers from weak investment, lopsided growth fueled by consumer debt and poor job prospects for some workers after the pandemic, he said.

"They will keep the taps on and make sure that as Poloz said a year ago, extra water on the fire rather than too little," Stillo said, referring to comments made Stephen Poloz before he retired as Governor last year.

KEEPING SINGLE MANDATE

The BOC will use existing flexibility in meeting its 2% inflation mandate rather than seeking to overhaul its framework later this year to add a jobs target, Stillo said, echoing what other sources have told MNI. The mandate is set under five-year agreements with the government and is due for a renewal this year. "I hear that it's largely still going to be what they have been successful at, and anything around that would be a very marginal change," he said.

Inflation may remain above 2% for a while partly on forces that interest rates have little control over, such as a national carbon tax and short-term supply disruptions, Stillo said. Bigger wage gains may in fact be helpful over the longer term by drawing in more workers to boost supply, he said. "You aren't going to get that wage-price spiral," in this recovery, Stillo said.

Pushing on with monetary stimulus would also keep the BOC in sync with a Liberal government expected to call an election in the next few months seeking a new mandate to spend big, a stance opposition parties including the main Conservatives largely support as well.

"It will be an interesting time when all these supports end, both for households and businesses that have relied on them, whether we can turn the taps off," he said. "I have concerns about a number of underlying challenges. They have been masked by government support."