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MNI INTERVIEW: Steady CPI Dents 50BP BOC Hike Case- Ex Adviser

Source: Bank of Canada

Signs that inflation will slow toward the Bank of Canada's target range over the next year weaken the case for another 50bp interest-rate hike, former BOC adviser Steve Ambler told MNI.

Governor Tiff Macklem's view inflation could slow to 3% by the end of next year is reasonable even without another outsized hike according to Ambler, a retired UQAM economics professor who's also part of a shadow monetary policy council at the CD Howe Institute. The Bank of Canada targets inflation at 2% but around a target band of 1%-3%.

“It might be wise for the Bank to sort of ease off on the gas at this point, to see how much their past increases are going to feed through,” Ambler said. He spoke after Statistics Canada reported the inflation rate was unchanged at 6.9% in October, and slower than June's four-decade high of 8.1%.

Ambler pointed to a 0.2% monthly gain in food prices that implies the annual pace could weaken significantly from the latest 12-month reading of 10%, he said. And while core inflation rates remain elevated, Ambler also noted that three-month annualized core rates the Bank has focused on recently are now just above 3%.


Governor Tiff Macklem's recent comments also suggest he's become dovish relative to the Fed, Ambler said. That's a switch from earlier this year when he was more aggressive with rate hikes including July's 100bps move. Macklem has also devoted more attention lately to comments about the risk of over- and under-tightening and the prospects of rising unemployment and the lagged effect of past rate hikes.

“It seems like the Bank is preparing people for the end of the tightening cycle,” Ambler said. “The rhetoric by the Bank of Canada has softened a lot more than the rhetoric coming out of the Fed.” The Bank's last hike of 50bps versus the Fed's 75 is already a switch from earlier this year when Canada led the G7 in tightening.

The Bank may also be on a path from today's 3.75% overnight rate to a terminal rate of 4.25%, Ambler said, short of the 4.5% several economists surveyed by MNI predict. That path would address signs that the 350bps of hikes this year are already slowing the housing market and will help slow a somewhat chaotic job market.

“The real numbers are looking as though there has been some impact already,” notably in housing, he said. “It might be time for the Bank to take a breather." Other former advisers have also told MNI the Bank will wind up rate hikes over the next few meetings. (See: MNI INTERVIEW: BOC Nearly Done Hiking On Stall Risk-Ex Adviser)


The Bank in the past has also noted much of the impact of a rate change comes about a year later, so hiking now could end up driving down price gains just as they enter the target range. Officials have also said the economy faces some downside risks including a recession early next year.

To be sure, inflation remains elevated and Bank's two preferred core rates ticked up a notch to an average of 5.1% in October. The fact that a lot of inflation is still coming from gasoline suggests less pressure elsewhere, and households will likely pay a a lot of attention if food price gains do slow down, he said.

“That’s what most consumers are probably concerned about,” he said. “Things are headed in the right direction.”

Consumer Price Index

Source: Statistics Canada

MNI Ottawa Bureau | +1 613-314-9647 |
MNI Ottawa Bureau | +1 613-314-9647 |

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