Moving above a certain level brings a clear risk of overshooting, says CIBC's Tal
The Bank of Canada would risk overshooting on interest rates if it took its overnight rate above 4%, according to CIBC deputy chief economist Benjamin Tal (pictured) – although he indicated that improving supply chain conditions are a positive sign for Canada’s inflation outlook.
Delivering a keynote address at the National Mortgage Conference hosted in Vancouver by Mortgage Professionals Canada (MPC), Tal said that the central bank could avert a deep recession by ending its rate-hike trajectory after one or two further jumps, potentially by 50 basis points followed by another 25-point increase.
“I believe that if [the Bank stops] at 3.5%, 3.75%, even 4%, you can have this recession that is happening now without major damage – and therefore, I will not call it a recession,” he said.
“However, you go to 4.5% [or] 4.8% as many people expect, you cause a significant recession with the unemployment rate rising at 2%, 3%, which will be recessionary. That will be, people believe, what you need to do in order to take inflation to 2%. I disagree.”
Around 50% of the recent decline in inflation has been caused by easing supply chain pressures, he said – meaning that his message to the Bank of Canada is to stop at 3.5% or 3.75% and “call it a day. See what happens – you don’t have to overshoot.”
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At the height of the COVID-19 pandemic, supply chain disruptions were responsible for about 90% of inflation in Canada, although that figure is declining at a substantial rate and now sits around 55%. That trend means softer inflation of goods is likely as a result, something that would be an all-round positive development for the economy, Tal said.
Once the central bank rate reaches its peak, it’s unlikely to start falling in 2023, according to Tal, although he forecast that cuts the following year would eventually bring it to about 2.75% as a “new normal” rate.
He added that the five-year rate is likely to start going down in 2023 ahead of the Bank of Canada rate, but also cautioned that there’s no guarantee the central bank will hit pause on its rate-hiking cycle if inflation remains a persistent challenge.
“When you’re talking about inflation with clients, it’s important to understand that if you give the Bank of Canada two options – one is recession, the other is inflation rising – they will take a recession any day,” he said.
“They are telling you that. The Bank of England is basically telling you, ‘We are aiming at a recession, we are cheering for a recession.’ The Bank of Canada is not using this kind of language, but definitely thinking this way. The same goes for the Fed.”
That’s because the Bank has spent four decades establishing a reputation as “inflation fighters,” according to Tal, something it wouldn’t be prepared to sacrifice to stave off the possibility of an economic recession.
The Bank “does not care” about inflation today – but has its sights set on inflation expectations, or what Canadians expect price growth to be in the near future, Tal said.
“They have to show us that they mean business. That’s why they raised interest rates by 100 basis points; that’s why later this month, they will raise by another 50 basis points,” he said. “They want to make sure that you and I understand that they’re not behind the curve, and they’re going to fight inflation and bring it to 2% regardless of what happens.”
Canada’s annual inflation rate fell for a third consecutive month in September, although it inched down by just 0.1% over August’s result and was 0.2% higher than economists had anticipated.
The COVID-19 pandemic has played a huge role in contributing to that ballooning inflation, and Tal indicated that while it will remain a factor in the months ahead, it’s unlikely to have as severe an impact on the economy as during 2020 and 2021.
“Yes, COVID will be with us even next year, but it will not dominate us. We are going to see a transition, and it’s happening maybe already, from a pandemic to an endemic,” he said. “The virus is not dead – [it] will be with us, but we will have enough ammunition to fight it.
“It will not dominate the agenda – it might impact the agenda, but it will not dominate it, like it has over the past two and a half years.”