MNI INTERVIEW: Half-Point BOC Hike Needed To Curb Inflation

The Bank of Canada should hike interest rates half a point to send a strong message about heading off cascading wage and price gains at a time when the official inflation rate understates the true trend, a former top statistics agency economist said in an interview.

Consumer prices are really rising at about the U.S. pace approaching 7%, according to Philip Cross, Statistics Canada's former chief economic analyst and now a senior fellow at the Macdonald-Laurier Institute. The agency reported 4.7% inflation for the 12 months through October, a gap Cross attributed to Canada not including figures on used cars that have pushed up American CPI. StatsCan reports November inflation on Wednesday and investors predict a 4.7% pace.

The bigger danger is if workers demand much heftier wage increases, Cross said. That could come in two ways: employees demanding increases that mirror inflation or long-term workers pressing for the same bonuses used to re-hire amid record job vacancies.

“You can rein this in, but time is of the essence now,” Cross said. “People aren’t going to settle for 2%-2.5% wage increases when inflation is 5%.”

“With rates at such historically low levels, we should be thinking about raising rates 50 points at a pop, not 25,” Cross said. BOC last week left its overnight rate at 0.25% and said conditions for an increase aren't expected until the middle quarters of next year, while also underlining growing concern about price gains becoming embedded.

'CONSIDERABLE TIGHTENING'

Most economists see a BOC hike by April, but some investors are betting on a move sooner and perhaps five rate increases next year. For the BOC and the Fed, a slow embrace of quarter-point hikes risks allowing inflation to get out of control, Cross said.

“If all we get next year is two or three rinky-dinky quarter point increases in interest rates, interest rates are still going to be at incredibly low levels, that’s not going to deal with a 7% inflation rate,” Cross said. While the BOC has cut rates by half a point on 11 occasions since 2000, it's only hiked by that much once at the start of that period, a reflection of the low-for-long rate era.

The pandemic supply shock makes it harder to pull demand back and stabilize inflation, Cross said. Without help from other policy makers to slim fiscal stimulus or boost production, monetary policy must tighten even more, he said.

“The Bank of Canada can rein in the demand, if that’s the only thing that we’re going to do to realign demand and supply they are going to have to pull demand down fairly substantially, which means a considerable tightening of monetary policy,” he said.

Sources have told MNI it's unclear whether Canadians carrying record debt loads can handle a jump in rates following a housing boom that's stretching towards a decade.

“Everybody’s been behind the ball on inflation, and the central bank is now scrambling to catch up," Cross said. “They will eventually catch up.”

Source: CFIB