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MNI China Daily Summary: Thursday, December 12
MNI STATE OF PLAY: BOC Nears First Rate Hike Since Pandemic
Dual risks from hot inflation and omicron damage
The Bank of Canada is set for one of its most divisive rate decisions in years Wednesday, with the market split on whether Governor Tiff Macklem will lift the record low 0.25% benchmark to address scalding inflation or hold off to bring the economy through the most infectious wave of Covid so far.
Eleven economists surveyed by MNI call for no move, eight see an increase, and trading in bankers' acceptance contracts shows a 73% chance of a hike by March. Most bets on hiking came last week after the Bank's own survey showed two-thirds of executives see inflation topping its 1%-3% band over the next two years and StatsCan reported CPI at 4.8%, the fastest since Canada adopted inflation targets in 1991.
The case for waiting to raise rates is based on omicron stalling first-quarter GDP and keeping the economy from full output, a destination Macklem last month said was a condition for tightening. Canada's first rate hike since 2018 could also spook a generation of heavily indebted homebuyers and run against Prime Minister Justin Trudeau's commitment to keep stimulus flowing.
At a minimum the Bank is seen signaling a March hike, tossing out previous guidance for a move by April, and raising inflation forecasts again, perhaps its view of Q4 CPI at 2.1%.
Assessing whether omicron is turning Covid into a more mild illness that may soon become manageable or whether the virus will remain more damaging is still a daunting question even for public health officials. "Take a walk around Toronto or Montreal or most major cities in Canada, and you’ll quickly see life is hardly normal as pandemic restrictions or lockdowns remain in place," BMO strategist Benjamin Reitzes wrote in a briefing. "The omicron wave is the biggest factor holding us back from looking for a rate hike at this meeting."
NEW COUNCIL VOICES
Macklem has said since becoming Governor in mid-2020 the pandemic requires an overwhelming response in line with a 'risk management' view of central banking. Last month he said he's looking more at data, more in line with a view of 'data dependent' policymaking that would demand tightening.
The BOC's last decision saw tightening in the "middle quarters" of 2022 when the economy reached full output and inflation was sustainably at 2%. Officials said they are "closely watching inflation expectations and labour costs to ensure that the forces pushing up prices do not become embedded in ongoing inflation" and fewer economists the BOC forecast of inflation around 2% in the second half being realized.
"The most prudent course of action is for the BoC to look through the omicron lockdown and hike by 25 bps in January in order to ensure that inflation expectations do not become unanchored," TD Securities strategists led by Andrew Kelvin wrote in a briefing.
The Bank hasn’t hiked since October 2018 when the benchmark rate climbed to 1.75%. Whether or not the hike is Wednesday or in a few months, many economists see rates climbing perhaps four times this year and further in 2023. Macklem said last month in response to a question from MNI that while the pandemic downturn required swift action such as half-point cuts, the recovery hasn't been as sudden, suggesting outsize rate increases are less likely.
One final wild card is that Senior Deputy Governor Carolyn Rogers joined the seven-member rate-setting panel on Dec. 15 and Deputy Governor Sharon Kozicki in August. Neither has made significant public remarks since joining the group.
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.