MNI INTERVIEW: BOC Needs Faster Hikes, Risks Slump-Ex Adviser
Bank of Canada was slow to react to predictable inflation, Morck says.
The Bank of Canada needs to raise interest rates even faster after being late to curb inflation that was foreseeable through major pandemic stimulus, and the economy faces the risk of a hard landing, former BOC research fellow Randall Morck told MNI.
"The hard landing fears arise because many banks in particular might be carrying loans that will turn out to be bad after the post-Covid dust settles," said Morck, a University of Alberta professor whose work focuses on financial stability and monetary policy.
The Bank hiked its overnight lending benchmark to 1.5% from 1% on Wednesday, the second 50b move in a row, and signaled it could be more forceful if needed to pull inflation back from around 7% to its 2% target.
"I worry that the rate hikes may not be sharp enough," Morck said. In past decades interest rates had to rise sharply and above prevailing inflation rates to bring price gains back down, he said. "This is what I think the BOC ought to do."
That view is sterner than Deputy Governor Paul Beaudry's Thursday speech where he said it's becoming more likely that rates could rise above neutral, which the Bank estimates at 2%-3%. Beaudry when asked about triggering a recession said “we’re aiming for this soft landing, but it is a difficult compromise.”
MONEY SUPPLY A CULPRIT
Morck also put more emphasis on the money supply than unexpected global events such as the Ukraine war or supply-chain kinks when looking at inflation. "The only really effective way to cut inflation is for central banks to stop creating money," he said.
Policymakers have resisted active sales of government bonds purchased during Covid, opting instead to allow them to roll off the books as they mature over several years. The Bank's narrowest measure of the money supply known as M1+ has grown at a double-digit annual pace for more than two years and for a while the gains were 30%.
"Inflation probably ought to have been a higher central bank priority for some time," Morck said.
Deputy Beaudry said this week officials under-estimated inflation as Covid eased and are studying what went wrong before the next rate decision in July. The speech also reviewed why the Bank waited until March to raise the record low 0.25% lending rate.
'THIS WAS ALL FORESEEABLE'
Central banks erred in looking at the Covid recession as something like 2008 when more of the QE stimulus was aimed at propping up financial markets, Morck suggested.
"A big difference is that this time round governments spent the money they raised selling bonds on Covid relief checks to all manner of ordinary people," he said.
"Business slowdowns and shutdowns during Covid reduced goods and services production," he said. "That adds up to more money in circulation and fewer goods and services being produced, which means dollars per good or service rises," he said.
"That’s why consumer inflation is a bigger deal now. This was all foreseeable."