MNI INTERVIEW2: BOC Overdoing Hikes, Western's Williamson Says

The Bank of Canada is overdoing interest-rate hikes given that inflation has already slipped back into the central bank's target range, a former BOC research fellow told MNI.

The tightening “to me didn’t make sense,” said Stephen Williamson, previously a St. Louis Fed vice president of research and now a professor at Western University in London, Ontario. “I thought they were going too far.”

BOC Governor Macklem told reporters after a July 12 hike to 5%, the highest overnight borrowing rate since 2001, that he's prepared to go further if needed to slow inflation to his 2% target. Most economists see the Bank holding at the next meeting in September and some chance of a hike in October alongside new economic forecasts. (See: MNI INTERVIEW: Canada Seen Hiking At Least 50BP More-WLU Prof)

Inflation slowed to 2.8% in June, within the Bank's 1% to 3% target range. While inflation had quickened a notch to 4.4% in the CPI report before Macklem first returned to hiking in June, price gains had been steadily slowing from last summer's peak of 8.1%.

WITHIN SHOUTING DISTANCE

Macklem argues that while he doesn't want to go too far, he's concerned about elevated core inflation, an overworked economy and a potential rise in price expectations with CPI seen above target until mid-2025.

“Inflation in Canada, it’s within the range, and they are saying we can’t get to 2% for another two years, does that make any sense?” Williamson asked.

“Central banks, by the measures they commit too, they are within shouting distance of the target, but they want to go in the other direction,” Williamson said. “You get the good news and they are determined to keep going in the other direction.” (See: MNI INTERVIEW: Fed Running Out Of Reasons To Hike- Williamson)

Core inflation remains elevated, with officials highlighting the three-month pace has run at 3.5%-4% since last fall. Yet the resolution of pandemic-related disruptions mean those kinds of figures may not last, Williamson said.

MIND THE LAGS

Rather than focusing on robust growth that could suggest supply bottlenecks are vanishing, officials are taking the pessimistic case the economy remains beyond capacity limits, he suggested.

“The strong growth you’re getting, maybe that’s an indication that all that stuff is going away, that you have lower constraints on production,” Williamson said. “You might say that’s good news for inflation.”

Minutes from the last rate decision published Wednesday showed officials discussed a delayed drag on the economy from hikes that began at the record low 0.25%. That's an argument worth bearing in mind as well, Williamson said.

“If it takes a long time to work, well all of the hikes you’ve made leading up to now, they are still having some effect,” he said. “You don’t have so far to go (on inflation), why do you need more increases? It’s not clear.”