MNI INTERVIEW: Canada Seen Hiking At Least 50BP More-WLU Prof

The academic who beat the market by predicting steep Bank of Canada rate hikes now says his model suggests policymakers will move at least another half point to make sure inflation returns to target.

“Inflation isn’t coming down to 2% fast enough, so if it’s not coming fast enough to 2%, that is a signal we need to do more,” said Christos Shiamptanis of Wilfrid Laurier University. “They are going to have to do more into coming meetings. And yes, there could be a case that they go beyond the 0.5%. Our model says 0.5 is the bare minimum.”

Last September he and co-author and Ke Pang said their research indicated the Bank would hike to 4.75%, something done last month before they went further on Wednesday to 5%, the highest since 2001. Around last September the Bank's key rate was raised from 2.5% to 3.25%. (See: MNI INTERVIEW: Canada Could Hike To 4.75%-WLU Researchers)

Their paper, based on internal projections by the central bank recently made available with a multiple-year lag, shows the BOC tends to respond more to lasting deviations from the inflation target. The Bank's new quarterly forecast is notable in projecting inflation above the 2% target over the entire forecast horizon, even showing a 2.1% pace in the fourth quarter of 2025, he said.

COULD HAVE GONE 50

The Bank said Wednesday inflation will now be above the 2% target until mid-2025, longer than a previous estimate for the end of 2024. Officials also boosted this year's inflation forecast to 3.7% from 3.5%, just a few months after saying they could pause rate hikes because price gains were coming back under control.

The Bank could have justified moving half a point this week instead of the 25bps that was announced, Shiamptanis said. (See: MNI BOC WATCH: 25BP Hike To 5%, Warning On Inflation Sticking) His recent estimates for more rate hikes are again hawkish compared with market economists. Most of those forecasters say the Bank is done hiking, or that there could be one more move in September or October.

Governor Tiff Macklem told reporters he's prepared to hike further if required and "several things need to happen for inflation to continue easing." Officials discussed a rate pause, Macklem said, but he didn't mention any discussion of hiking 50bps.

The breadth of industries remaining strong after the Bank's nine prior rate hikes and stubborn core inflation underline more tightening is needed, Shiamptanis said. “All measures are pretty much telling us the same story: inflation is declining, but it has remained outside the upper bound of the inflation target.” The Bank's inflation target band is 1% to 3%.

LOOKING FAR AHEAD

Canada's central bank has done better than its peers with being forward-looking, he said. Officials appear to be looking at least a year and a half and perhaps nine quarters ahead when it comes to calibrating policy.

“I’ll give them credit,” Shiamptanis said. “A lot of people are attacking the central bank” but “they are doing very well” balancing shifts in supply and demand, he said.

One reason the economy may be more robust than thought is the rise of remote work that helps people find new jobs faster, he said. That would lower "frictional" or "structural" unemployment economists have long said limit job market gains.

Shiamptanis has said the model he created with Pang doesn't take into account the Bank's current internal inflation forecasting or the judgement of officials like Macklem, an important consideration at a time of big swings fed by Covid, supply chain shocks and the Ukraine war. “Trying to match an evolving demand with an evolving supply, it’s just a harder task.”