MNI INTERVIEW: BOC Seen On Hold Until Mid-2024 Cut- Stillo

The Bank of Canada is done hiking and will reduce borrowing costs around the middle of next year, as the economy faces a mild recession while governments shy away from major fiscal stimulus to make sure inflation subsides, a former forecasting manager for the country's largest province told MNI.

“The Bank of Canada, they have done enough,” to curb inflation, said Tony Stillo, former head of macroeconomic policy and modeling at the Ontario Ministry of Finance. “They should be because what they’ve done is enough to tip us into a hard landing.”

Canada's GDP will shrink 1.5 percentage points through early next year while unemployment rises to 7.2%, enough to pull back wage inflation and stabilize consumer prices around the middle of next year, Stillo said. That's a year sooner than the Bank's estimate for returning CPI to its 2% target. Stillo, now Canada director at Oxford Economics, says the lagged impact of past rate hikes and fresh housing weakness will curtail GDP more than most forecasters expect.

Recent Bank statements about being prepared to raise interest rates further are partly aimed at ensuring investors don't get ahead of themselves betting on cuts again, Stillo said, as many have done through much of the pandemic rebound. Most economists predict the Bank will hold at its meeting next month while market bets for a hike crept up last week as inflation quickened to 4%.

Monetary easing will be gradual next year, Stillo said, with Canada's slowdown moderated by executives choosing to cut staff hours instead of positions with many still worried about worker shortages. Canada's jobless rate fell to record lows before the recent pick-up and wage gains remain elevated.

NEUTRAL FISCAL POLICY

Other evidence that a mild recession is coming comes from Canada's mixed picture of consumer finances. Some households are in good shape after saving Covid relief checks, Stillo said, while others are hurt by higher mortgage rates, pain that will build as more borrowers with five-year terms have to refinance.

While governments are under pressure to help Canadians deal with the higher cost of living and a housing supply squeeze, they will stick with relatively neutral fiscal policies from here, said Stillo. Big spending would force the central bank to hike rates even more, he said. (See: MNI INTERVIEW: Trudeau Must Fix Housing Without Fanning Prices)

“They will be more targeted, there won’t be a broad, massive fiscal stimulus because it would undermine the Bank,” he said. It's better for governments to focus on regulations that boost housing supply because adding to demand “might be self-defeating.”

Many economists who bet on a recession have been proven wrong as consumer spending powered ahead through the first quarter. Like Bank officials, Stillo said it appears spending earlier this year was lifted by temporary factors, so he's more confident a slowdown is coming now. (See: MNI INTERVIEW: BOC Can Wait On Rate Hike- UofT Researcher)

The drag of the Bank's rate hikes from near zero to the highest since 2001 at 5% cannot be overlooked, he suggested, especially in Canada where consumer finances and housing are more stretched. “The full impact of past hikes in interest rates are still coming, and we are looking for them into the second half of next year and spilling over into next.”