MNI INTERVIEW: BOC To Cut By July, Go Slow- Ex Deputy Beaudry
Prices are sticky but the economy has been weak for a while.
Former Bank of Canada Deputy Governor Paul Beaudry told MNI the central bank remains on track to lower interest rates at one of its next two meetings and the pace will be slow given evidence of sticky inflation.
“Things are pointing in the direction of lower rates in Canada ” said Beaudry, who retired from the Bank last July and returned to the University of British Columbia. “That caution is very much how fast.” (See: MNI INTERVIEW: BOC Can Move Far Once Rate Cuts Begin- Devlin)
Scope to reduce the 5% rate -- the highest since 2001 -- is limited by the risk that the stubborn inflation seen in the United States flows into Canada in coming months, according to Beaudry. Even if Canada goes on a somewhat different inflation path, which is historically rare, the Bank can only diverge so much from the Fed on policy, he said.
“There’s no problem with moving up to a percentage (point) difference with the U.S. More than a percentage difference starts getting into the sort of risky area for the exchange rate,” said Beaudry.
STAGFLATION-TYPE ISSUE
Another deterrent to major rate cuts is the danger of even a mild form of stagflation, Beaudry said, a concept Governor Tiff Macklem has downplayed. “The hardest part for monetary policy is the situation where the economy is in some sense hurting and inflation’s not coming down. It’s that stagflation-type issue that you really want to avoid.”
Headline prices rose 2.9% in March, the third straight month inside the Bank's target band, but CPI has been above target for three years now. Macklem has said a rate cut is possible at the next meeting on June 5 if there is clear evidence price stability is being restored, and before then comes crucial data on inflation next Tuesday and quarterly GDP on May 31.
There has been progress on key measures officials are watching, Beaudry said -- core CPI, price expectations, and wages. Core inflation has slowed to around 3% in recent months and wage gains have slipped under 5%.
“If we saw all three of those really starting to come down and even if they’re not at two but if they are falling, like they go from 2.5% to 2% quickly, that means they are going to be undershooting,” Beaudry said.
PER-CAPITA RECESSION
Macklem has said he can cut rates before inflation is all the way back to target and officials want to avoid inflicting needless pain on the economy. The trigger point for ensuring things don't become overly restrictive hinges on the single inflation mandate rather than other indicators, Beaudry said. His view contrasts with some experts saying Macklem will loosen policy to stem a jump in the jobless rate. (See: MNI INTERVIEW: BOC Set To Start Cuts In June - Senator Gignac)
“What I think he’s implicitly wanting to say is I don’t want to overshoot in terms of inflation at some point being below target, that would be the aspect of feeling I’ve overdone it,” Beaudry said.
Figuring out the degree of weakness is distorted by Canada's record immigration that's boosting growth while raising questions about another lift to housing prices. Beaudry agrees with economists who say new arrivals are masking a downturn.
“In per capita terms it is a recession,” Beaudry said. “It makes much more sense to define in per capita terms, and in that sense the Canadian economy has been growing very slowly over quite a while.”