MNI Bank Of Canada Preview: Jun 2022
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MNI Bank Of Canada Preview: Jun 2022
Meeting: Wed, 1 Jun
Statement only: 1000 ET
Economic Progress Report: Thu, 2 Jun
Paul Beaudry (Dep Gov) remarks published 1045ET before event starts 1100ET. Beaudry should start speaking at
~1110ET with Q&A for event attendees at 1135ET. Media availability will follow at approx. 1215ET.
MNI Review of Apr Meeting: https://marketnews.com/mni-boc-review-apr-22-forceful-ahead
Contents
• Page 1-3: MNI POV (Point of View)
• Page 4: Data Watch/ Key Intermeeting Commentary
• Page 5: Instant Answers/ Market Implied Rates
• Page 6-8: Sell-Side Analyst Views
• Page 9-11: MNI Policy Team Insights
MNI POV (Point Of View): A Stepping Stone To July?
By Chris Harrison
• The Bank of Canada is almost unanimously expected to hike its overnight rate by another 50bp to 1.5% on
Wednesday (28 of 29 analysts on Bloomberg) as part of its journey to neutral, defined as 2-3%.
• The statement-only release is likely to maintain its hawkish tone to keep inflation expectations from de-
anchoring but offer little in the way of new guidance – i.e. rates need to increase further with timing and
pace guided by the inflation target.
• Hawkish surprises could come from language around moving further into excess demand or inflation being
increasingly persistent and broad-based, but the market is likely more sensitive to dovish commentary
concerning the global growth backdrop and/or moderation in Canadian housing activity.
Guidance from BoC staff and the strength in data since the last meeting on April 13 mean a second 50bp hike to an
overnight rate of 1.5% on Wednesday is almost unanimously expected. Instead, this meeting feels like a stepping
stone to get to the July 13 decision, at which point the Bank will be within striking distance of the lower end of its
neutral rate range of 2-3% and will have to provide clearer guidance on where it wants to pause, if at all. That July
meeting will coincide with the Monetary Policy Report’s fresh round of the forecasts and Governor Macklem’s press
conference to flesh out its latest message. On top of two extra labour market reports and one extra CPI report, it
will also allow the Bank to digest its key business and consumer surveys for Q2 on July 4. All that is to say that this
Wednesday’s upcoming decision is likely to maintain a hawkish tone as justified by what’s likely a 50bp hike, but it
might provide little new guidance.
To be clear, a 50bp hike is clearly justified. When the Bank last
met, the average of the three main core inflation measures was
thought to be 3.5% Y/Y; today, two reports later with large
upside surprises and revisions, that average is 4.2% Y/Y. Within
that, CPI-common, a measure which tends to be less sensitive
to changes in supply chains and instead more heavily focused
on services, has increased to 3.2% Y/Y and is above the 3%
inflation target upper band for the first time since Sep’91. As for
headline vs Bank expectations, the previous MPR had forecast
inflation averaging 5.8% in Q2 yet it hit 6.8% Y/Y in April and
with some analysts looking for a 7-handle in May with gasoline
prices surging.
1The labour data in the single release since the April
decision were more mixed in that employment growth
didn’t live up to expectations after some extremely strong
months and the participation rate fell, but the latter helped
the unemployment rate fell a further tenth to 5.2% for a
new low since the series started in 1976. Separately, job
vacancies are now known to have jumped to north of 1
million back in March, getting just shy of 1 vacancy per
unemployed person – low compared to the 2 in the US
but up considerably from the 0.4 a year ago and likely to
continue supporting wage growth pressures.
One surprising area most recently was GDP, coming in at
3.1% in Q1 after 6.6% in Q4, contrary to analyst
expectations of 5.2% after a string of strong monthly prints. That did however leave it almost completely in line with
the BoC’s forecast of 3.0%, which it then sees picking up to 6% in Q2.
However whilst the domestic data and inflation in particular have been strong, we feel we can rule out a 75bp hike
for a variety of reasons:
i) Global growth consensus has continued to be revised down as inflation bites.
ii) Market measures of inflation breakevens have softened since the April meeting, with the 5Y breakeven
down more than 20bps. That said, the 10Y breakeven has also moved lower of late but is little changed
from the April meeting and both measures remain elevated, keeping the need for 50bp hikes.
iii) Governor Macklem has ruled out larger than 50bp moves as “very unusual”.
What To Watch In The Statement
With only the statement published before Dep Gov Beaudry speaks on Thursday, we can’t rule out it being
repeated almost verbatim, but it would be remiss of us not to say watch the final summary paragraph for any
change in outlook. Any teeing up of a 50bp hike in July will likely be left to Beaudry.
Final para: “With the economy moving into excess demand and inflation persisting well above target, the Governing
Council judges that interest rates will need to rise further. The policy interest rate is the Bank’s primary monetary policy
instrument, and quantitative tightening will complement increases in the policy rate. The timing and pace of further
increases in the policy rate will be guided by the Bank’s ongoing assessment of the economy and its commitment to
achieving the 2% inflation target.”
There has been ample talk of moving towards the neutral range of 2-3% quickly and potentially above it, from both
Governor Macklem at the last BoC Monetary Policy Report and most recently Dep Gov Gravelle, but this tends to
be left out of the statement. Instead, it’s most likely to keep to the rate path guidance of being conditional on
achieving the 2% inflation target. We wouldn’t be surprised either way if mention of QT is removed or not after
starting passive roll-off at the last meeting – the Bank has been keen to state that the policy rate is the primary
instrument and is ruling out active sales. That said, mention of the possibility of active sales would be the most
hawkish steer the Bank could give, although is deemed unlikely.
2The rest of the guidance in the statement will likely come from the descriptions around the growth (both global and
domestic) and inflation outlook. The Bank isn’t scheduled to give fresh forecasts but watch for acknowledgment that
inflation and less so domestic GDP growth has been coming in stronger than expected, evidence of the economy
moving further into excess demand. However, also watch for an implied undershoot in growth further out in the
forecast as global growth is marked lower.
Global growth: “The Bank now forecasts global growth of about 3½% this year, 2½% in 2023 and 3¼% in 2024”.
Canadian growth: “The Bank forecasts that Canada’s economy will grow by 4¼% this year before slowing to 3¼% in 2023
and 2¼% in 2024. Robust business investment, labour productivity growth and higher immigration will add to the
economy’s productive capacity, while higher interest rates should moderate growth in domestic demand”.
“In Canada, growth is strong and the economy is moving into excess demand. Labour markets are tight, and wage growth
is back to its pre-pandemic pace and rising. Businesses increasingly report they are having difficulty meeting demand, and
are able to pass on higher input costs by increasing prices. While the COVID-19 virus continues to mutate and circulate,
high rates of vaccination have reduced its health and economic impacts. Growth looks to have been stronger in the first
quarter than projected in January and is likely to pick up in the second quarter. Consumer spending is strengthening with
the lifting of pandemic containment measures. Exports and business investment will continue to recover, supported by
strong foreign demand and high commodity prices. Housing market activity, which has been exceptionally high, is
expected to moderate.”
The language around inflation can potentially pose two-sided risks in terms of hawkish/dovish implications. Inflation
upside surprises have been attributed to the invasion of Ukraine but acknowledgement that domestic factors are
increasingly at play would likely be construed as hawkish.
“Russia’s ongoing invasion of Ukraine is causing unimaginable human suffering and new economic uncertainty. Price
spikes in oil, natural gas and other commodities are adding to inflation around the world. Supply disruptions resulting
from the war are also exacerbating ongoing supply constraints and weighing on activity. These factors are the primary
drivers of a substantial upward revision to the Bank’s outlook for inflation in Canada.”
As for inflation expectations, language last month was firmed from “Persistently elevated inflation is increasing the risk
that longer-run inflation expectations could drift upwards .” to: “There is an increasing risk that expectations of elevated
inflation could become entrenched”.
The moving lower in inflation breakevens since the last meeting leaves the small possibility this is softened (a
dovish surprise) but it’s perhaps easiest to leave this unchanged, especially to avoid otherwise mixed messages
whilst hiking 50bps at the same time and risking a re-drifting higher in inflation expectations.
3Central Bank Watch - Bank of Canada
May 31, 2022
MNI Bank of Canada Data Watch List
Inflation Current 3m ago 3m Chg 6m ago 6m Chg 2Y History Hit / Miss Vs Trend Surprise Index Z-Score
CPI % y/y 6.8 5.1 4.7 1.76
Core CPI - Median % y/y 4.4 3.4 2.9 1.78
Industrial Product Price % m/m 0.8 2.6 1.4 -0.65
Breakeven 10-Year % 2.18 2.03 1.93 0.76
Economic Activity Current 3m ago 3m Chg 6m ago 6m Chg 2Y History Hit / Miss Vs Trend Surprise Index Z-Score
PMI Manufacturing Index 56.2 56.2 57.7 0.21
GDP % m/m 0.7 0.1 0.3 0.47
Manufacturing Sales % m/m 2.48 1.25 -2.16 0.21
Trade Balance CAD bn 2.49 -1.40 0.72 0.54
Monetary Analysis Current 3m ago 3m Chg 6m ago 6m Chg 2Y History Hit / Miss Vs Trend Surprise Index Z-Score
M3 Money Supply % y/y 8.50 7.95 4.93 -0.32
Bank Lending Survey (Q) % m/m -3.88 -9.38 -14.02 -0.02
New House Prices % m/m 0.3 0.9 0.9 -1.13
Housing Starts K 267.3 235.4 239.6 0.55
Consumer / Labour Market Current 3m ago 3m Chg 6m ago 6m Chg 2Y History Hit / Miss Vs Trend Surprise Index Z-Score
Retail Sales % m/m 0.0 -1.4 -0.9 -0.45
Retail sales Ex-Autos % m/m 2.4 -2.9 -0.1 0.65
Employment Chge m/m K 15.3 -200.1 20.0 -0.43
Ave Hourly Wage Rate % y/y 3.41 2.40 2.07 0.87
Markets Current 3m ago 3m Chg 6m ago 6m Chg 2Y History Hit / Miss Vs Trend Surprise Index Z-Score
S&P/TSX Composite Index 20919 21126 20660 0.90
Canadian 10-Year Yield % 2.89 1.81 1.57 1.44
CAD Yield Curve (2s-10s) bps 25.2 37.8 58.4 -0.80
CAD TWI Index 126.32 124.53 123.32 0.84
Note: For quarterly data the 3m ago column will display the previous data point and the 6m ago column will display the data point prior to that.
Source: MNI, Bloomberg
Key Inter-Meeting BoC Commentary
Speaker Commentary Since Previous BoC Rate Decision
Toni Gravelle How commodity prices affect our economy (May 12)
(Dep Gov) Rates: “Our policy rate, at 1%, is too stimulative, especially when inflation is running significantly above the top of
our control range.” […] “As we said in April, we could pause our interest rate increases when we get close to the
neutral rate […] Or we could raise interest rates beyond neutral levels”.
Could pause “as the rate enters our estimated range for neutral of 2% to 3%” if i) “price increases reversed
course”, ii) goods demand declines faster than we expect just as supply and inventories finally expand, iii) if there
is a “larger-than-expected slowdown due to higher indebtedness and unsustainably high housing prices”.
We may also need to raise rates above neutral because parts of the economy may be less sensitive to rate hikes
than in the past. That’s because, on average, Canadians are in better shape financially than they were before the
pandemic.
“These considerations should make it clear that we are not on a pre-set path of policy rate increases aimed at
getting to a specific “terminal” rate. Our decisions are not on autopilot.”
Inflation: “We said in April that we expect inflation to average almost 6% in the first half of 2022 before easing to
about 2½% in the second half of 2023 and returning to the 2% target in 2024. And the March CPI number was
above what we were projecting and will likely lead us to further revise our near-term profile for inflation.”
CAD: “The Canadian dollar would typically appreciate alongside the rising trajectory of our commodity prices, but
we’re not seeing much of that now” […] “The main factor has likely been the strength in the US dollar, which has
benefitted from safe-haven flows as the Ukraine war broke out as well as a sharp rise in US yields.”
Growth: “We expect the recent increase in commodity prices to boost the level of business investment in
Canada by less than half of what our models generally predict based on historical relationships.”
Carolyn Rogers Earning the trust of Canadians (May 3)
(Sr Dep Gov) “The intensity and persistence of supply chain disruptions have surprised us. What started as narrowly focused
problems in a few key products—like computer chips—has spread to a wide range of goods.”
4MNI Instant Answers
The questions that we have selected for this meeting are:
• Overnight Rate Target (level):
• Does the Bank say interest rates may need to rise to neutral, or to around neutral?
• Does the Bank say it may need to raise interest rates ABOVE neutral?
• Does the Bank say it could pause as the policy rate approaches neutral?
• Does the Bank say it may need to be nimble or forceful with policy?
Market-Implied Rate Outlook
With usual caution that the contracts can be volatile, BoC-dated OIS
has easily more than 50bp priced (68bps) as part of a cumulative
103bps for the July meeting, something that analysts agree with
below. This is on the way to 183bps of hikes over the five meetings
to year-end, leaving an implied policy rate at 2.79%. The BAX
futures curve shows something similar, with a particularly flat curve
from the Mar’23 contract onwards that crudely implies a terminal
overnight rate between 2.75-3.0%, at the top of the Bank’s recently
revised neutral rate range. This terminal is back where the curve sat
after the April BoC decision but remains considerably below peaks
from late last month. Some analysts do however still look for that
sharper pace of hikes only for the Bank to then begin considering
cuts in late 2023.
Another area of note is a dispersion of CAD views. CFTC net speculative positioning has recently fallen back to a
net short position, growing to the largest since Nov’21 but at 9.2% of open interest isn’t particularly sizeable
compared to past cycles (and notably smaller than the ~30% net short for AUD and NZD). Meanwhile, from a long-
term historical perspective, the loonie in real effective terms is almost exactly aligned with the rolling 10-year
average, leaving little directional bias, whilst Barclay’s see CAD as not appearing stretched in their FFV model.
Short-term reaction in USDCAD is uncertain, with risk sentiment flows seemingly driving the pair instead of yield
differentials/fundamentals (such as Canada’s surprisingly large current account surplus in Q1). However, some
analysts below note a constructive outlook for CAD: Barclays sees USDCAD grinding lower over the medium-term,
ING sees potential for market instability extending into the summer to keep the pair near 1.27-1.28 before a break
below 1.25 in the latter part of the year, and BofA have a year-end forecast of 1.23.
Analyst Views
28 of the 29 analysts in the Bloomberg survey expect the policy rate to be hiked 50bps to 1.5%, with a single
analyst looking for a 25bp hike. However, there remains a wide range of views when it comes to the rate path
amongst analyst calls seen by MNI – see below.
5Analysts’ Key Comments
(In alphabetical order):
BofA: Forcefully Hiking Towards Neutral, Supportive For CAD
• We continue to expect the BoC to hike 50bp in June and in July, and then in 25bp clips at each meeting to
reach a terminal rate of 3.50% in April 2023, above the neutral 2-3% range.
• We continue to expect the economy to grow over 4% this year, inflation is well above target and pressures
continue. House prices keep increasing and are at high levels compared with other countries, whilst the
labor market remains tight.
• The 50bp expected hike is fully priced in, which we see as providing a cheap option to pay for a surprise
75bp, with the recent above-consensus inflation opening the door to this possibility but a very low
probability.
• Rates: The market continues to perceive this hiking cycle as front-loaded and subject to reversal as the
business cycle matures. We see growing risks of a Fed pause later this year which might help lower US
rates relative to CAD rates, but would likely lead to a global rates rally if it transpires.
• FX: USDCAD had pushed above 1.30 over the past few weeks, driven by higher risk aversion and a
softening in energy prices. However, it has since moved below 1.28, and has been consistent with our
overall modestly positive CAD outlook, with a year-end forecast still at 1.23. The BoC rate hikes should
prove further supportive for the currency, in our view.
BMO: Maintaining Recent Hawkishness
• The Bank has maintained a consistent tone since the April MPR, leaving little reason to believe it will
deviate from 50bp pace.
• In the April MPR the BoC forecast inflation to average 5.8% in Q2, and we already printed 6.8% for April,
while May looks like it will sport a 7-handle with gasoline prices up over 10%. It’s clear that the BoC was
vastly underestimating inflation momentum.
• Inflation remains the major driver for the BoC, but market chatter has started shifting to growth worries.
Worries about the negative impact from a slowing housing market on the broader economy will remain front
and centre. We’ve yet to see other significant signs of a softening economy, but it’s clear that broadly rising
prices are taking a bite out of purchasing power.
• BMO see a third 50 pointer in July, after which the pace of hikes should slow but inflation and growth
outcomes have the potential to materially shift the policy path once neutral is reached.
• The tone of the policy statement and next-day speech from Deputy Governor Beaudry are expected to
maintain the recent hawkishness.
• The OIS market is well priced, with the recent rally leaving few if any clear opportunities. The front end
looks on the cheap side versus the US, but nothing too egregious given levels seen over the past year.
• The best opportunity likely arises from the BoC policy announcement coming on June 1, which is a big day
for Canada coupon payments and maturities, as well as the index extension. With the BoC on June 1,
dealers have probably been a bit more reluctant to position for the June 1/2 flows for fear of getting
something unexpected from the Bank.
Barclays: Constructive View On CAD In Medium Term
• We now expect the BoC to hike by 50bp in June and July, followed by 25bp hikes in every subsequent
meeting through January 2023, taking the policy rate to 2.75% by the end of the year with the terminal rate
at 3%.
• We expect the statement to retain a hawkish tone, clearly indicating that rates need to keep rising with the
economy in excess demand and inflation persisting well above target.
• The BoC is not on autopilot and as the hiking cycle matures, the bank will become more data dependent
once hitting the lower bound of the 2-3% neutral range.
• A 50bp hike in June is well priced and should not come as a surprise and the bar for the BoC to deliver it is
quite low. Deputy Governor Beaudry will deliver the economic progress report on Thursday, which will likely
provide more clues on the pace of future hikes than the statement.
• FX: The CAD does not appear stretched as per our FFV model. Given the uncertain macro and risk
backdrop and our expectation of the BoC to not surprise the market and consensus expectations this week,
the risk-reward does not justify a trade. In the medium term, we retain our constructive view on the CAD
6and continue to expect USDCAD to grind lower. We see room for the CAD to stay supported by higher
terms of trade, strong economic fundamentals and a determined BoC.
Desjardins: 50bp Hike A Done Deal
• The Bank will likely eschew anything larger than a 50bp hike, deeming it a bridge too far.
• It’s easy to argue with that logic when inflation is tracking 7%, but central bankers have made their feelings
known. As a result, a 50bp rate increase looks like a done deal.
• Expect yet another 50bp move in July before policymakers shift to a more cautious approach to monetary
tightening later this year.
ING: Don’t Dismiss The Possibility Of A 75bp Hike
• A strong economy, booming jobs market, and elevated inflation argue for another "forceful" 50bp hike on 1
June. And the Bank is unlikely to stop there, with a red hot housing market and support from rising
commodity prices suggesting it may be even more aggressive than the Fed this year.
• The market is unsurprisingly fully backing a 50bp hike, given the latest raft of data. We would argue that
you cannot dismiss the possibility of a 75bp hike given the current macro environment.
• Mortgage rates have not risen as rapidly in Canada as in the US due to the typical mortgage being a 5yr
mortgage amortised over 25 years. This rate is more determined by short-term borrowing costs as opposed
to the longer end in the US so the BoC tends to need to be more aggressive on policy rate increases to
generate the same degree of monetary tightening.
• We see greater upside for BoC rates than for the Fed funds rate, with the BoC set to hike to 3.5% in early
2023, above the 2-3% “neutral range” highlighted by some BoC officials. However, the fast pace creates
risk of adverse reaction in the economy and we wouldn’t be surprised to see the BoC having to consider
reversing course in late 2023.
• FX: In the shorter term, only a 75bp hike on Wed or hawkish hints of such will be able to materially lift the
loonie, considering a 50bp move is fully priced in. Further out, the CAD swap curve has the year-end rate
around 2.68% but ING see “quite elevated” chances of hiking to 3% before end-22, a bullish argument for
CAD in the medium run and helping push USDCAD below 1.25 in 2H22. However, with market instability
possibly extending into the summer, the pair may stay near 1.27-1.28, gearing up for a break lower in the
latter part of the year.
JPM: Not A Time To Proceed With Caution
• The Bank of Canada has its work cut out for it and with inflation showing signs of accelerating this is not a
time for the Bank to proceed with caution.
• The Bank continues to signal aggressively hawkish sentiment. While it didn’t tell us anything new, Deputy
Governor Gravelle noted recently “we are taking actions to normalize our policy rate quickly and are
prepared to be as forceful as needed.”
• We expect the Bank to hike 50bp next week for the second meeting in a row leaving the policy rate at
1.50%, before a third frontloaded 50bp increase in July. We believe the Bank is aiming to achieve a neutral
policy rate of 2.5% by year-end.
• Financial conditions have continued to tighten in recent weeks, with markets appearing to be pricing in
more inflation risk and a responsive central bank as we expect.
• Consumer sentiment fell further this week, with growing pessimism linked to increasing concerns about
inflation while concerns around Covid are receding.
National Bank: Looking For A Relatively Quiet, As-Expected Meeting
• Consistent with markets and the broader forecasting community, we expect a second straight 50bp hike,
bringing the overnight target to 1.50%. With QT already underway and on autopilot, the focus will remain
squarely on the outlook for the policy rate.
• Despite the rapid tightening in financial conditions, a nasty streak of upside inflation surprises means the
Bank is in no position to ditch its hawkish stance and we don’t expect any push back against a third 50
basis point rate hike in July.
• We do, however, expect the statement’s rate guidance to remain vague and flexible, simply reiterating that
“interest rates will need to rise further”. The Bank is likely to keep markets guessing how far above 2% the
terminal rate will be and if their base case involves hiking into restrictive territory (i.e., above 3%).
• Next week’s decision will not come with a fresh MPR, though the statement will acknowledge an already-
offside CPI forecast.
7RBC: Another 50bp Hike On The Way To Neutral Mid-Point By October
• The Bank is widely expected to hike another 50bps to 1.5% as the Bank continues its inflation fight.
• Inflation is running at the fastest year-over-year pace since the early 1990s. And the economy is running
hot, evidenced by still-strong GDP growth and a multi-decade low level of unemployment.
• We expect GDP growth for Q1 (also to be reported next week) to come in at 4.5%—above the BoC’s last
published forecast of 3%.
• The looming question is whether rates need to rise above neutral 2-3% range to get inflation under control.
• So far, surging inflation has been as much a result of extremely strong demand as supply limits. Higher
rates should work to address some of that pressure, with initial impact already felt in the housing market.
• We look for the Bank of Canada to raise the overnight rate to 2.5% by October.
TD: With 50bps Widely Expected, Watch The Statement For A Hawkish Tone
• We look for the Bank to deliver another 50bp hike in June to bring the overnight rate to 1.50%. With little
uncertainty around the decision itself, the focus will shift to the statement where we expect a hawkish tone.
• There will be no MPR or forecast update and as such we expect a relatively short communiqué. The Bank
will note that growth and inflation are both tracking above the April MPR, and repeat that rates will need to
rise further with the pace/timing dictated by assessment of the economy.
• On the growth front, we look for the Bank to reiterate a positive outlook for exports, household spending,
and business investment, while noting that housing activity continues to slow.
• The commentary around inflation will have to once again acknowledge that price pressures continue to
broaden; look for the Bank to once again point to the war in Ukraine and supply chain disruptions as
contributing factors along with strong domestic demand, with the statement reiterating that the BoC will use
monetary policy to keep inflation expectations well-anchored and to bring inflation back to target.
• High conviction of 50bp hikes in Jun and Jul before slowing to 25bps until pausing at 3% in Jan’23 with an
eye to preparing for cuts in early 2024.
• FX: Global factors remain a crucial driver of the loonie, likely limiting the impact of the BoC's anticipated
50bp rate hike especially as USDCAD sits close to our high frequency fair value estimates of 1.28. We
expect USDCAD to maintain the 1.26-1.30 range through the summer but will look to fade extremes.
• Rates: A 50bp move is broadly expected, but the accompanying tone could impact front-end rates on the
margin. A hawkish statement would reinforce the index-related flattening which we see as the dominant
event in CAD markets on June 1.
UBS: Heading To Neutral, But Not Very Restrictive
• The Bank will likely hike 50bps to 1.5% as Dep Gov Gravelle said recently that inflation has surprised the
Bank’s projections to the upside and UBS note that Q1 GDP growth is tracking close to 5% annualised
compared to the BoC’s forecast of 3% in April.
• Statement to retain tough talk on inflation, citing the risk that expectations of elevated inflation could
become entrenched but will also likely mention the deterioration of the global backdrop.
• A message from the BoC over the last several weeks is that there is a strong consensus that the policy rate
should move to the range of neutral, but low conviction on what should be done afterwards.
• Governor Macklem and Deputy Governor Gravelle said that the hiking cycle could pause if demand slows
abruptly or if inflation pressures moderate
• We think that by the October meeting both of these situations could materialize. If we are correct we think
the BoC would pause hiking and reassess the situation. We therefore expect another 50bp in July which
would bring the policy rate to the neutral range before a 25bp in September before pausing in October.
• Unlikely to move to very restrictive stance: Senior Dep Gov Rogers noted stabilization of commodity prices
and supply chain disruptions should naturally bring inflation down provided the BoC keeps inflation
expectations anchored, implying they do not need to actually see inflation coming down aggressively in
order to pause. Further, the consumer in Canada could be more sensitive to higher interest rates than in
the US given higher levels of leverage
8MNI Policy Team Insights
MNI STATE OF PLAY: Bank of Canada Seen Hiking 50BP, Framing QT
(Published May 27)
By Greg Quinn
OTTAWA (MNI) - The Bank of Canada will likely raise its overnight policy rate half a percentage point to 1.5% June
1 and signal a similar move for the July meeting, taking borrowing costs toward neutral amid what may soon be the
fastest inflation since the 1980s.
Governor Tiff Macklem hiked 50bps in April and has said he'll be forceful if needed, while adding that going any
faster would be unusual. The Bank last tightened half a point in 2000 and hasn't done more since raising a full
percentage point in 1998.
Former Governors David Dodge (https://marketnews.com/mni-interview-boc-must-reach-neutral-rate-fast-fmr-gov-
dodge) and Stephen Poloz (https://marketnews.com/mni-interview-neutral-rate-needed-with-inflation-risky-poloz)
have told MNI the BOC needs to move to at least neutral as a show of resolve in the face of unstable price
expectations. Current Bank officials estimate a neutral rate around 2.5% and have said they aren't on autopilot so
they could pause around there or go further depending on factors such as how indebted consumers react. The
Bank may also need to hike more to counteract fiscal stimulus in a hot economy, according to TD Bank and former
BOC advisers.
For now inflation is the dominant concern, with the risk of a recession downplayed amid record low unemployment.
Consumer prices climbed 6.8% in April from a year ago and Deputy Toni Gravelle in a recent speech said the
strength of recent figures meant the Bank would once again be raising near-term inflation forecasts.
--MORE COMING IN JULY
The BOC has already said inflation will average almost 6% in the first half of the year, triple its 2% objective.
Inflation will remain near the top of the Bank's 1%-3% target band next year at 2.8% and won't return to 2% until
sometime in 2024, policymakers predict.
All 20 economists polled by MNI see the overnight rate moving to 1.5% on Wednesday. While a few see a small
risk of a 75bp move (https://marketnews.com/mni-interview-boc-may-need-75bp-hike-on-cpi-surge-ex-adviser), the
consensus is to spread the moves out with another 50bps at the following meeting and more tightening later this
year.
The last big piece of data on first-quarter GDP comes out Tuesday morning, likely too late for Governor Tiff
Macklem to change course. If anything, Statistics Canada's flash estimate for Q1 output growing 1.4% signaled
more strength than the Bank's earlier forecast, which already said the economy was moving beyond full capacity.
The decision comes with a one-page statement Wednesday at 10am EST, and a speech and press conference on
Thursday.
MNI INTERVIEW: Neutral BOC Rate Can Bring Soft Landing -Poloz
(Published May 20)
By Greg Quinn
MNI (Ottawa) - Former Bank of Canada Governor Stephen Poloz told MNI Friday that lifting interest rates to neutral
could be enough to curb inflation and price expectations without triggering a recession.
Higher global commodity prices and a "very tight" labor market create risks of more embedded inflation
expectations that have to be dealt with, Poloz said in an interview Friday. "That has the ingredients to cause
9inflation to go up, and so therefore the normalization of interest rates would be intended to eliminate that excess
demand, so that inflation no longer has this upward pressure."
"I did say normalizing interest rates, which means getting them to neutral, but that's kind of a wide range of
possibilities anyway," he said. The Bank recently said the neutral rate runs from 2% to 3%, and its benchmark
overnight lending rate now stands at 1%. Many economists see 50bp hikes (https://marketnews.com/mni-interview-
boc-may-need-75bp-hike-on-cpi-surge-ex-adviser) on June 1 and again in July.
"If nothing else is going on and you knew the neutral rate was let's say 2.5%, you could just mechanically go to
2.5%," he said. "And then you'd have this question that you're raising is: Would that be enough or do you have to
go further?"
--HIGHER RISK OF ERROR
Fed Chair Jerome Powell made a good case for the idea that tightening policy to remove excess demand such as
high job vacancies should be enough, Poloz said. Markets "seem to believe we actually need a recession or close
to a recession in order to cause inflation to go back down," he said.
"We don't need one," Poloz said. "That doesn't mean we wouldn't have one by mistake or just because the oil price
effect is bigger than most people give it credit for," he said. "For one reason or another we could have one, but
according to the models that I use, you don't need to have one in order to get inflation to go back down."
Inflation could slow to between 4% and 5% early next year and to around 3% later in 2023, but the interaction of all
the forces pushing up prices elevates the danger (https://marketnews.com/mni-interview-boc-must-reach-neutral-
rate-fast-fmr-gov-dodge), Poloz said.
"The risk of it continuing and maybe there being a mistake made is higher than it normally would be, because there
are so many things we don't know," he said. "We don't know if the movement in interest rates will have the same
size of effect on the economy as it had five years ago or 10 years ago." Higher energy and commodity prices also
seem to be having less of an impact on boosting Canada's economy and its dollar than in past cycles.
--CENTRAL BANKS MEAN BUSINESS
The good news is unless crude oil prices continually keep rising, some of today's high inflation will unwind due to
base effects, and Canada could be very close to a peak in CPI, Poloz said.
"Symbolically that will be really important because inflation won't be rising every month. Even if it's high, people will
say at least it's heading down," he said.
"You've got the central banks raising rates, which means they mean business, and you've got them doing QT,
which shows twice that they mean business. So that combination of falling inflation and actions of the central banks
ought to re-enforce expectations that one way or another we are heading back to 2%."
After inflation subsides, it should also become clear that productivity has greatly improved through the pandemic as
digitalization, flexible work habits and automation took hold, he said.
MNI INTERVIEW: BOC May Need 75BP June Hike- Ex Adviser Ambler
(Published May 16)
By Greg Quinn
(MNI) - The Bank of Canada needs to do more to control inflation and could even find itself obliged to hike by 75
basis points on June 1 followed by more tightening to above the neutral rate, former BOC adviser Steve Ambler
told MNI.
10Increases of 25bps in March and 50bps in April lag this year's inflation jump, meaning real rates have turned even
more negative and signaling the central bank is further behind in a quest to pull demand back in line with supply,
Ambler said. Inflation has climbed 1.6 percentage points this year to 6.7%, the fastest since the Bank adopted
inflation targets in 1991, and has topped the 2% target for over a year.
Governor Tiff Macklem raising the 1% overnight rate by 50bps at the next meeting "is pretty much guaranteed and
at this point I wouldn't even be shocked to see a 75-basis-point increase," said Ambler, who also helps lead the
C.D. Howe think tank's shadow monetary policy council.
"Real rates are actually becoming more and more negative, which if you're trying to fight inflation by reducing
demand, having real interest rates that are more and more negative is not going to get it for you," Ambler said.
The Bank says the neutral rate ranges from 2% to 3% and policy makers say they "are not on autopilot" and could
pause as they get into that range or move beyond depending how the economy evolves. (See MNI INTERVIEW:
BOC Must Reach Neutral Rate Fast- Fmr Gov Dodge https://marketnews.com/mni-interview-boc-must-reach-
neutral-rate-fast-fmr-gov-dodge)
--ABOVE NEUTRAL
"They were thinking that interest rates may have to go above the neutral level; to me that seems to be an incredibly
mild statement at this point," Ambler said.
Positive real rates are all but a necessity now, he said, and the prospect of inflation expectations rising further is a
concern. "That's going to make it harder for the Bank to get inflation down, it's probably going to mean that the
overnight rate is going to have to increase more than the Bank is expecting," Ambler said.
Based on the Bank's own surveys, Ambler said, "what it looks like is that consumers or households are expecting
that the Bank isn't going to be able to get inflation back down to target in the next two years, which is a bit
worrying."
At this point, sticking with a half-point increase at the June meeting is more likely because moving faster might look
panicky and "that could have a perverse effect on expectations," he said.
Ambler's views are more hawkish than consensus. Just a handful of market economists see a 75bp hike as an
outside possibility for June, after Macklem said that the 50bp move was already unusual. Some of Canada's
biggest commercial banks also see rate hikes halting at or below neutral this year as indebted consumers feel the
added squeeze of higher mortgage rates.
"Managing (inflation) expectations at this point is more important," than worries about a hard landing
(https://marketnews.com/-2657210038), Ambler said. "I'm hoping that we can get out of this without a full-blown
recession, but we will see."
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