(RPT)MNI INTERVIEW: BOC In One And Done Zone - Chamber

(Repeats story first published on January 20)

The Bank of Canada will hike one more time Wednesday and take a pause to assess how much inflation moderates, and a cut late this year can't be ruled out amid public pressure if output plunges, says Canadian Chamber of Commerce chief economist and former government researcher Stephen Tapp.

A hike would be the eighth in a row to the highest level of rates since 2007 and the Bank can avoid going further as it's become clear inflation peaked around the middle of last year, Tapp said in an interview Wednesday for MNI's FedSpeak podcast. He predicted a quarter-point move to 4.25%, in line with consensus.

One last hike is still needed because the inflation slowdown from June's 8.1% to 6.3% in December is uncomfortably slow and it won't return to the top end of the Bank's 1% to 3% target band until the end of this year, he said. Governor Tiff Macklem's decisions are becoming more data dependent, with unemployment near record lows and price expectations elevated, Tapp said.

“We’re still really far from mission accomplished for central bankers,” said Tapp, who has worked at the Bank and the finance department. “If they took their foot off the gas right now and didn’t raise rates, they would then be in a position where it would be difficult to start raising rates again” if needed.

DON'T POLITICIZE THE BANK

Hiking much further would be risky with the economy heading to a steep slowdown or mild recession, Tapp said. Some opposition lawmakers say tightening to date will cause a needless recession, and that, coupled with the Bank's new losses on its bond purchases, make its messaging trickier than usual. (See: MNI INTERVIEW: BOC's QE Losses May Dent Inflation Fight- Tombe)

“If inflation does come down quickly, I think a lot of these criticisms are going to evaporate,” Tapp said.

Conservatives have also attacked the QE program saying it amounted to monetary financing of reckless government deficits. Macklem took office after his predecessor opened up the QE account.

“The politicization of central banking in general is not a good thing,” Tapp said. “Tiff was one of my first bosses at the Bank of Canada, I have a lot of respect for him as a governor and think he’s done a great job given the hand he’s been dealt, coming in in those circumstances during the pandemic.”

SOFT-ISH LANDING

Scope for a rate cut this year is fairly limited, with Tapp estimating core inflation running around 4%, but there have been too many surprises in the last few years to rule it out, he said.

“They will probably pause it and hold that rate for a sufficient amount of time until they actually see more progress” on inflation, he said.

That scenario is supported by signs that companies may lean towards "hoarding" workers in a slowdown because of difficulty finding new recruits. That could limit any rise in unemployment to less than 6% from about 5% today, he said.

“It’s going to be pretty easy to keep rates at an elevated level if we have a soft-ish landing,” Tapp said.