MNI INTERVIEW: BOC To Slow Hiking Pace After 100BP Move- Ragan

The Bank of Canada will likely dial back to half-point interest rate hikes after Wednesday's surprise full-point move sent a clear message about winning the inflation fight, former central bank and finance department adviser Chris Ragan told MNI.

“The front end loading to me was 'This is the big change.' You should expect future increases, but they will probably be smaller," Ragan, a McGill University professor, said in a phone interview from Montreal on Friday.

Governor Tiff Macklem said the front-loading beyond market bets for a 75bp increase aimed to head off entrenched inflation. The CPI will likely advance around 8% in coming months, four times the Bank's 2% target.

“This is also partly an admission that they were kind of late to the game, so they are going to do more now, send a very clear signal, and the front end loading, my interpretation of that is probably the next increase isn’t 100 basis points," Ragan said. "Probably the next one is 50, and then maybe he will do a couple of 50s, or maybe he will do a 50 followed by some 25s.”

NO LONGER SO WELL ANCHORED

If the Bank hikes another another percentage point to 3.5%, that would mesh with Macklem's view he could go just beyond the neutral rate estimated at 2% to 3%. Given the uncertainty around estimating neutral, the key message is that rates must keep rising to break inflation, Ragan said.

His near-term view is less aggressive than former adviser David Laidler who told MNI Wednesday that another full-point move remains an option at the September decision.

Ragan said the Bank's own surveys show price expectations “are no longer so well anchored around 2%” and the jumbo hike should help reset the path of price gains. “That will tend to moderate wage demands and inflation expectations, and that’s very important for preventing the creation of a wage-price spiral," Ragan said.

“They still have very accommodative or stimulative monetary conditions, and if you want to bring down inflation, you have to raise those real rates, which means really raising the nominal rates when inflation expectations are so high.” Near-term price expectations appear in the range of 4% to 5% today, he said.

CHOCK-FULL OF JUDGMENT

The terminal rate is hard to assess because of the unusual shocks of Covid and the Ukraine invasion, Ragan said. Worse still, central banks can't control energy prices or create the usual drag on consumer spending from higher interest rates because families are desperate to travel and socialize again, he said.

Canada's position as a major commodity producer adds another layer of complexity since export revenue is growing while the rest of the economy may suffer if the global economy slumps, Ragan said. Still, a few quarters of negative GDP growth may be a necessary cost of meeting the inflation mandate, he said.

“You never really know how high you have to go, because you don’t know exactly where the neutral rate is. Monetary policy is an art and it’s chock-full of judgment," Ragan said. “We’ve just been hit by a shock the likes of which we’ve never seen.”