MNI INTERVIEW: BOC Seen Pausing Rest of Yr- CD Howe's Robson

Canada has good cause to keep interest rates steady for the rest of the year as past hikes drag inflation close to target and the cumulative tightening by global central banks slows demand, Bill Robson, head of the CD Howe Institute think-tank and its shadow monetary policy council, told MNI.

“I’m quite optimistic about the path of inflation—and I’m paid to worry,” said Robson, whose organization often hosts events with top central bankers and economic policy officials.

Investors haven't been so resolute about a long pause, betting earlier this year on a rate cut and more recently some saying a final quarter-point hike is possible in the next few months. Bank Governor Tiff Macklem says he expects to hold his 4.5% rate for a while unless there's an accumulation of evidence his forecast is off track for inflation to slow to 3% around mid-year and return to the 2% target in 2024.

“It wouldn’t be at all surprising to see the rate hikes the Bank of Canada has done already, and the Fed has done, work their way through the economy and continue to bring inflation down,” Robson said on MNI's FedSpeak podcast. The Bank's overnight rate has climbed from 0.25% since last March, one of the sternest campaigns in decades, and inflation has slowed from 8.1% in June to 5.9% last month.

GLOBAL OVERSHOOTING RISK

While the job market remains strong, it's "notorious" for being one of the last parts of the economy to show momentum swings, said Robson, whose organization also dates Canadian business cycles and recessions. Job gains are also a hopeful sign that the economy can avoid a painful downturn, he said.

“We’re going to continue to see consumers pulling back in more interest-rate sensitive areas,” he said. “It’s likely that we are going to see at least a couple of very soft quarters, it wouldn’t be at all surprising to see a couple of negative quarters.” (See: MNI INTERVIEW: BOC Has Strong Case to Cut This Year-Ex Adviser)

Central banks collectively face an overshooting risk, Robson said, similar to how looser fiscal and monetary policy during Covid contributed to the inflation wave. “When everybody is doing the same thing, it does heighten that risk, and so one of the things that we may have to deal with is some accident, some source of unexpected financial pressure.”

Restoring inflation to 2% next year will also help the Bank of Canada fend off recent political criticism and avoid more meddling the next time its mandate is up for renewal with the government, Robson said. The last renewal added unhelpful clutter by inserting language about seeking full employment when the inflation target is being met, he said.

CANADIAN DOT PLOT?

"There was clearly more than one set of fingers on the keyboard at that last mandate renewal,” he said. “What I would like to see in the next round is the whole thing getting kind of cleaned up.”

The recent move to publish meeting minutes will help deliver the inflation message, though it would be nice to go further and consider a group of outside policy makers and publish an expected path of interest rates, Robson said. One challenge is that only the Governor is legally responsible for monetary policy, so a Fed-style dot plot is probably unworkable.

While officials at the Bank see those moves as too strong, Robson noted inflation targeting was also originally seen as a fairly radical innovation when it began in the 1990s.

“The greater degree of transparency gives you a lot more nuance, and I think people’s discussions of Fed policy are better because they can see how the members are thinking and how they are thinking differently,” he said.