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(RPT)MNI INTERVIEW: No BOC Cuts In View, Hikes Possible-Tapp

(Repeats story first published Oct. 30)


Investors are too dovish about the Bank of Canada's outlook given that policymakers are still leaving the door open to additional rate increases and are nowhere near considering cuts, Chamber of Commerce chief economist and former government researcher Stephen Tapp told MNI.

The Chamber's third-quarter survey of executives also found 25% of them plan to raise prices in the next few months, about double the share consistent with inflation running at the Bank's 2% target, Tapp said in an interview. The central bank's own forecasts show inflation around 3.5% through the middle of next year and sluggish growth rather than a deep recession that would require monetary easing, he said.

“Will rates go up? Should rates go up? I wouldn’t be surprised. I think people are underestimating the persistence and how broad-based inflation pressures are," said Tapp, a former researcher at the BOC, federal trade finance bank, parliamentary budget office and finance department. "We are not really close to winning the war on inflation." (See: MNI INTERVIEW: BOC Could Hike Once Or Twice More, Dodge Says)

The Bank held its key rate at the highest since 2001 at 5% last Wednesday and officials said they could hike again if needed. Investors were not convinced and Canada's dollar fell to the weakest in more than a year. Many economists are now more confident the tightening cycle is done after 10 moves, and many are betting reductions will coming around the middle of next year. (See: MNI INTERVIEW: BOC Seen On Hold Until Mid-2024 Cut- Stillo)


Market participants might have focused too much on slower growth projections even as the Bank also boosted its inflation forecast for next year, he said. Macklem was correct to say that a deep recession isn't coming, Tapp said, cautioning that the BOC chief's rejection of stagflation prospects is more questionable.

"Stagflation is a situation where you have pretty persistent inflation prices pressures and you have pretty weak growth, and I think we have both of those things right now," Tapp said. Core inflation rates "have shown very limited progress," he said, and “not much is back at 2% right now” in the inflation basket. Headline inflation peaked around 8% in June of last year and, along with core rates, are a bit less than 4%.

Bank officials are paying closer attention to how long companies keep seeking bigger and faster price increases than they did before the pandemic. Tapp said things are normalizing but not as soon as officials might hope. “I still expect companies to raise prices at a higher rate and more frequently than they did before the pandemic, and I don’t think that’s going to change with the current dynamics right now, unless the economy really sags more than we think,” he said.

In addition, central banks worldwide face multiple risks from violence in the Middle East and the continued war in Ukraine. “There’s more downside risk to the economy, but that is also bringing more upside risk to inflation," he said. "That’s probably going to keep them with restrictive interest rates for a while, and I really don’t believe right now what markets are pricing in.”

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

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