MNI INTERVIEW: BOC Too Optimistic On CPI Slowdown-Ex Official

Inflation won't come down as easily as the Bank of Canada predicts, former top government economist Phil Cross told MNI, meaning investors should heed Governor Tiff Macklem's message that it's far too soon to consider a rate cut.

“We probably are past peak inflation," said Cross, former chief economic analyst at Statistics Canada and now senior fellow at the Macdonald-Laurier Institute. "But whether we're on a good easy glide path to come back to the target of inflation, I’m certainly nowhere near as convinced as the Bank of Canada and I'm not sure how confident they are.”

The Bank raised its overnight rate a quarter point to 4.5% Wednesday and said the eighth straight increase is likely the last if for example inflation remains on a path to reach 3% mid-year and its 2% target in 2024. Macklem said he can tighten again if needed and told reporters investor bets on a rate cut are premature. (See: MNI BOC WATCH: Macklem Hikes 25, Sees Pause If Growth On Track)

“The idea that we could get back to 3% this year, I think it strikes me as particularly optimistic,” Cross said. China's re-opening, global energy prices and more inflationary deficit spending in the U.S. and Canada keep the risks to the upside, he said, not to mention Canada's hot job market.

FISCAL AND WAGE PRESSURES

Unemployment is near a record low around 5% and StatsCan reported another strong wage gain Thursday in its secondary measure of payroll employment. “If wages continue to rise at four-and-a-half, five percent, it’s going to be very difficult to get core inflation back down to 2% anytime soon,” Cross said.

Inflation peaked at 8.1% in June and was 6.3% in December, while core rates held around 5%.

Source: Bank of Canada

Cross is working on a new paper and early results suggest fiscal policy has an under-appreciated role in times of high inflation. Finance Minister Chrystia Freeland should present a budget in the next few months and says she's under pressure to spend on health and the environment, though she doesn't want to make the Bank's job harder.

“I'm sure the Bank of Canada is telling Freeland, you guys better stop spending in because we have enough trouble bringing inflation under control. We don't need you working against us. But whether or not this government will listen, I don't know,” Cross said. Provincial governments have also been sending out checks including Manitoba again on Thursday. (See: MNI INTERVIEW: Deficit Means Little Scope For BOC Cut- Asselin)

RETIRING FORWARD GUIDANCE

The Bank's message about pausing to assess its hikes from a record low 0.25% over the last year and the potential for another hike is the right one, Cross said. “You see how people are reacting, particularly in the housing market and generally in the household sector. I think there's a real pain there.”

Macklem has also learned the lesson about giving detailed forward guidance after saying rates might remain near zero for quite a while, Cross said. “Let’s retire forward guidance,” Cross said. “Don’t make promises you can’t keep.”

Some investors are overly confident that interest rates are heading substantially lower, when in fact today's inflation has brought an end to the low-for-long era, Cross said.

“The easy part may be bringing inflation down from eight to four, but it could be very difficult from going from four to two.”