MNI INTERVIEW: BOC Seen Holding Till Q4 2022 as Inflation Ebbs

The Bank of Canada will overlook above-target inflation and economic growth topping 4% through next year, keeping interest rates on hold until the fourth quarter of 2022 to ensure the economy has stabilized after the pandemic, Deloitte Canada chief economist Craig Alexander told MNI.

That timing would be towards the tail end of Governor Tiff Macklem's forward guidance to keep the benchmark overnight rate at a record low 0.25% until the second half of next year, when he expects inflation to sustainably remain at a 2% target and the economy to regain its potential. Some investors are betting hot inflation means Macklem will move early -- in the first quarter of next year -- while market economists are split between the third and fourth quarters of 2022 or even early 2023.

"If inflation gradually subsides then the Bank of Canada will wait until late next year" said Alexander, who often testifies at parliament's economic committees including ones overseeing the central bank and is a former chief economist at the Conference Board Canada and vice president of economic analysis at the CD Howe Institute. "The fact there isn't a market consensus of when the central bank is going to start raising rates is also a signal about the uncertainty around inflation."

He sees inflation exceeding 3% through the rest of the year and running at 2.2% through the last nine months of 2022, faster than his June prediction it would bottom at 2.0%. Some of today's surge in prices to more than 4% is linked to base effects that will fade, and some supply chain issues will also be worked out as economies open further, he said.

LONGER-TERM WEAKNESS

"My base case is still that the temporary factors that are pushing up inflation will diminish, but I am closely watching for the possibility that these other factors can prevent inflation from falling," he said.

While GDP growth this year and next will be the fastest rates since 2007, there are still important drags even after mass vaccinations. Alexander cut 2021 growth from 6.7% to 4.9% on signs of setbacks amid the fourth wave of Covid.

"We are going to get less of a lift to economic growth than we were anticipating," he said.

Residential investment is also set to tumble for five straight quarters after surging to record highs, and governments have difficult choices around pulling back record deficit spending, he said. Alexander pointed to many industries still suffering from pandemic restrictions, oil and gas investment that's been in a tailspin for years, and other exporters that have lost U.S. market share.