MNI INTERVIEW: BOC To Delay Rate Cuts And Move Slow- Alexander

Canada's central bank will keep interest rates steady through the first half of next year and more importantly will only loosen its stance slowly according to Craig Alexander, a consultant who advises governments on fiscal and monetary policy.

“The real question is going to be not just when do they start lowering rates, it’s really how will rates come down, and my personal bet is they aren’t going to come down that much,” Alexander told MNI late Tuesday during a federal budget announcement. He's testified half a dozen times to Parliament's economic committees about fiscal and monetary policy and is a former Statistics Canada economist.

Governor Tiff Macklem has held the policy rate at the highest since 2001 at 5% for the last two meetings and economists see him on hold next month and through around the middle of next year, with some investors betting on a move in the second quarter.

Central bankers remain under pressure from free-spending governments, Alexander said, as the government reported Tuesday that program spending will rise more than 5% in the fiscal year starting next April, well ahead of what Macklem says is the economy's 2% potential growth rate. The Bank has likely already incorporated more government spending into its outlook, Alexander said, but the new figures will do little to subdue inflation.

THE ANCHOR ISN'T HOLDING

The latest inflation report showed consumer price gains slowed to 3.1% year-over-year in October from 3.8% in September as gasoline prices tumbled. Core rates also moderated though remained above 3%. (See MNI INTERVIEW: BOC Path Tied To Core Prices- Laurier's Siklos)

“What we’re probably going to find is inflation is very sticky, it was a lot easier to go from 8% to 3% than it’s going to be to go from 3% to 2%, and I think that’s the message I can hear pretty clearly coming from the central bank,” Alexander said.

“They are warning Canadians and warning businesses that interest rates could stay higher for longer," he said. "It doesn’t preclude them from bringing the overnight rate down from 5%, the point is it could still remain relatively elevated even when they do provide some interest-rate relief.”

The government's argument it will redouble its efforts to stick to a "fiscal anchor" such as lowering debt to GDP each year rings hollow when they have failed in the bigger issue of tightening policy through the economic rebound following the pandemic, he said. (See MNI INTERVIEW:Spending Remains Too Hot For BOC-Ex Govt Adviser)

“As a sailor I can tell you that as the winds pick up and the boat begins to rock, the anchor will not hold you in place,” he said. “Being a bit tighter on government spending would actually help the Bank deal with Canada’s inflation problem.”

Macklem was due to give a speech later on Wednesday on "The cost of high inflation", suggesting he may return to warning of further hikes if inflation is sticky and that it is too soon to look at rate cuts.