No hikes before 2022, CD Howe urges Bank of Canada

Institute’s monetary policy group recommends raising rates to 1% by October 2022, tapering bond-buying

No hikes before 2022, CD Howe urges Bank of Canada

As inflation exceeds the Bank of Canada’s target range for a sixth month in a row, the pressure’s on for the central bank to consider pulling the brakes on its accommodative monetary policy. But experts from the CD Howe Institute are urging it to hold off on announcing any rate hikes.

In a new policy note, the institute’s Monetary Policy Council (MPC) unveiled a recommendation for the BoC to hold its overnight rate target at 0.25% during its scheduled policy announcement next week and through December, before raising it by 25 basis points by April next year and ratcheting up to 1% by October of 2022.

The MPC also recommended that the central bank pare back its quantitative easing efforts from the current $2-billion-per-week pace.

The group acknowledged some forecasts that called for reduced projections of global growth, mainly due to concerns around China. However, it also agreed that Canada’s near-term demand outlook is generally positive, bolstered by factors such as robust job growth and high labour participation rates, strength in the housing market, healthy household balance sheets, robust trade terms, and positive business sentiment.

“The group’s views about the economy’s productive capacity, and the related question of whether inflation will drop back to 2-percent without significantly tighter monetary policy, were more mixed,” the note said.

On one side, some members of the MPC were inclined that slack in the Canadian economy is fairly low, and inflation is likely to remain above-target as global supply pressures take hold, particularly in the energy sector. Others argued that kinks in supply chains will get untangled as the COVID-19 pandemic wanes, adding that key measures, notably wages in Canada, are not pointing to higher inflation.

The group also repeatedly touched on the federal government’s fiscal policy. Several experts on the committee noted that less fiscal stimulus is desirable given the recent above-target inflation readings, and federal plans to spend and borrow more might force the BoC’s hand and institute more restrictive monetary policy than it would otherwise.

“The question of whether coordination of fiscal and monetary policy in responding to COVID might be compromising the Bank of Canada’s independence was a concern for some,” the note said.