MNI INTERVIEW: Investors Jump Gun On BOC Cuts- Ex Deputy Lane

Former Bank of Canada Deputy Governor Timothy Lane says some investors are still too aggressive looking for lower interest rates amid stubborn inflation and an economy that continues to confound predictions for a recession.

“It's way too early to say that inflation is done, and that implies possibly that it could take longer to get everything back to normal than might be hoped,” he told MNI in an interview. Lane retired from the Bank in September 2022 and had been a deputy since 2009 after spending two decades at the IMF.

“They're jumping the gun a little bit on when they think that things will get back to normal,” Lane said of the hopes of some Canadians and investors for quick rate cuts. Markets in recent weeks have pushed back bets on when the Bank will start cutting amid faster-than-expected growth and inflation, from moves as soon as April to perhaps as late as September.

Several things must settle before any clear view of when to cut emerges, Lane said. Price expectations have been contained because central banks learned the lessons of the 1970s but the return to normal after recent shocks will still take some time.

“That behavior once it's changed the way it has, it takes a while to change it back. I think not just the Bank of Canada, but the Federal Reserve and other central banks will be watching all those things looking at wage setting behavior, corporate pricing behavior and expectations,” he said.

NOT FULLY BEHIND US

Governor Tiff Macklem has said the debate has shifted from whether to hike rates for an 11th time to how long to keep the overnight rate at the highest since 2001 at 5%, underlining a real discussion can't happen until it's clear prices will stabilize at the 2% target. (See: MNI INTERVIEW: BOC Keeping 2024 Policy Restrictive- CD Howe)

“A lot of the difficulty is that inflation is still not fully behind us,” Lane said. “Even though inflation rates have come down very sharply from sort of 8% levels it was before... there still are forces in the economy that tend to perpetuate inflation.”

Canada's inflation rate unexpectedly quickened to 3.4% from 3.1% in December, and core measures also failed to make the sustained progress officials say is needed. Service price gains remain elevated and wages are climbing about 5% even as record immigration boosts labor supply, Lane said.

The pandemic's warping of the economic cycle may have also blunted monetary policy, Lane suggested, pointing to personal savings built up from relief checks and continued strong housing demand.

RISK OF DICTATED POLICIES

“It was always going to be hard to hard to know how much monetary policy tightening would be enough,” he said. “Some of the effects of higher interest rates in terms of cooling the housing market and the resulting effect on consumer spending really didn't materialize.” (See: MNI INTERVIEW: Peaking BOC Rate Rekindles Housing-Royal LePage)

As for a rate cut: “It's hard at this point to put an actual timetable on it. I think it's a question of waiting to see how things evolve.”

With the Bank moving closer to scaling back QT, Lane said that while a review of pandemic balance-sheet policies is a good idea more politically motivated changes are risky. Conservative Leader Pierre Poilievre has criticized the Bank's government bond purchases and pledged to fire Macklem if he wins an election due by October 2025.

“Perception of these things becoming highly politicized can have adverse consequences,” Lane said, citing Turkey as a recent example. “If you are dictating policies that are not right for the conditions because they're politically popular then that in itself results in some of those bad outcomes, it means you lose control of inflation.”