MNI INTERVIEW: BOC to Raise Rates Before 2023- RBC's Wright

Canada's central bank will raise its 0.25% interest rate in the third quarter of 2022 as the economy finds its feet again, sooner than the 2023 scenario laid out by policy makers, Royal Bank of Canada chief economist Craig Wright told MNI.

Even if second wave Covid lockdowns stall the economy this quarter, growth could start picking up significantly around midyear as vaccines are given to the most vulnerable, he said on Tuesday. Wright has testified at Parliament's economic committees and contributed to surveys the finance department uses for budget projections.

Bank of Canada Governor Tiff Macklem has said conditions for a rate increase -- inflation sustainably at 2% and slack in the economy used up,-- won't be in place until into 2023. But that view was based on an assumption last year that widely available vaccines would arrive in mid-2022, and the government has said that goal will now be reached around this fall.

"A year and a half from now we think that much of the worry around Covid will be behind us, vaccinations are broad-based, global growth will be on the mend," Wright said by phone from Toronto.

"They may want to wait a bit, but our guess is that as we move forward, they'll probably be revising up their growth number," he said. Wright sees Canada's economy expanding about 5% this year and returning to pre-pandemic levels, while the BOC in October said growth would be closer to 4%.

NO INFLATION SURGE COMING

Consumers have big savings built up after generous government relief programs, and the focus could turn to preventing business scarring including a plan for rolling out another CAD70 billion to CAD100 billion of deficit spending, Wright said.

"We need businesses to stay open, re-open, and expand for employment to recover and give support for the next leg of the consumer spending story," Wright said.

Job market slack, along with modest inflation expectations, mean the BOC won't be hiking from fear of runaway prices, Wright said. Inflation may quicken this year on the comparison to weakness in 2020, he said, a trend that will fade away.

"It's more about the economic growth story than the inflation story," Wright said. "It will also be an environment where we've seen rising rates in other parts of the globe as well, particularly the U.S. So I'm not worried about their credibility" in moving ahead of schedule, he said.

The Fed will raise rates before the BOC, a force that may take some steam out of the Canadian dollar's strength, he said. The appreciation of Canada's currency has come amid gains in energy and non-energy commodity prices and some risk-on trading, Wright said.