The Bank of Canada will almost certainly take the steepest road to higher rates next month.

Kevin Carmichael: The signs were there even before Friday’s game-changing speech

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The Bank of Canada will almost certainly take the steepest road to higher interest rates when its leaders meet next month to reset policy.

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Many observers would have jumped to that conclusion before Lt. Gov. Sharon Kozicki’s game-changer. talks on March 25.

His boss, Tiff Macklem, said after he and his deputies high the benchmark rate a quarter point on March 2 that the pace of future increases would be guided by the data. Data in recent weeks shows that the economy is considerably stronger than the central bank expected at the beginning of the year.

the unemployment rate was 5.5 percent in February, near a modern low, and the consumer price index averaged 5.4% year-over-year increases for the first two months of the year, compared with the Bank of Canada’s January forecast of 5.1% in the first quarter . That prospect preceded the Russian invasion of Ukraine, which has destabilized supplies of oil, natural gas, agricultural commodities and metals. “The result is short-term inflation that is expected to be higher than what we projected in January,” Kozicki said.

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Higher interest rates won’t guarantee rain on the prairies this summer, and Macklem has no influence over international oil prices. Bay Street Economist Argument by David Rosenberg that central banks are about to trigger a recession is a good thing. Unfortunately, if you’re Macklem and your primary job is to keep year-over-year increases in the consumer price index to around two percent, the latest data set leaves you with only one option: roll up faster.

Still, many of the people who are paid to predict where interest rates are headed were still hedging their bets at the start of last week, perhaps because Macklem on March 3 he had said he and his lieutenants “fully intend to deliberately and carefully tighten the policy, considering the impacts and monitoring the effects closely.”

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But that was before the unemployment rate fell to a level consistent with full employment — Statistics Canada reported there were 915,500 job openings in the fourth quarter, 63 percent more than a year earlier, and inflation was getting stronger.

Under Stephen Poloz, the previous governor, the Bank of Canada stopped pointing Bay Street and Wall Street in the direction interest rates were heading. He believed that professional investors and analysts had begun to put more effort into reading between the lines of central bankers’ speeches, depriving markets of the kind of rigorous analysis that ensures price discovery.

bay street I was furious when the Bank of Canada cut the benchmark interest rate in January 2015 without warning. Poloz’s answer, essentially, was that anyone looking at the data should have seen it coming. Oil prices had collapsed, and the story was clear about what happens to Canada’s trade-dependent economy when the value of its most valuable exports plummets.

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Macklem is more open to being hand held a bit. He took some heat in january for choosing to leave interest rates unchanged, even though all the boxes for an increase had been checked. There will be no ambiguity before the next political decision on April 13. Kozicki telegraphed a relatively aggressive half-point hike, rather than the usual quarter-point change, and indicated that policymakers will likely stop buying government bonds, a process called quantitative. tightening (QT).

“I hope that the pace and magnitude of interest rate increases and the start of QT will be active parts of our deliberations in our next decision in April,” he said in remarks prepared for a conference organized by the Federal Reserve Bank. from San Francisco. “The reasons are simple: inflation in Canada is too high, labor markets are tight, and there is a considerable boost in demand.”

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Kozicki’s steer had the desired effect. The dollar jumped and bond yields rose. Veronica Clark, an economist at Citigroup Global Markets Inc., changed her forecast and now forecasts half-point increases in April, June and July, followed by a series of quarter-point increases that leave the benchmark rate at 2.75 percent. cent per year. -final, compared to 0.5 percent today.

“The aggressive tone of the speech throws the door wide open for more aggressive rate hikes,” Benjamin Reitzes, an economist at BMO Capital Markets, said in a research note.

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Kozicki probably didn’t need to play the role of Walmart greeter, signaling analysts to the “half point in April” aisle. Several of his counterparts at the US Federal Reserve, including Chairman Jerome Powell, made similar comments about his own intentions last week. The Bank of Canada doesn’t always follow the Federal Reserve, but with the risk of inflation running away, the Canadian central bank couldn’t allow a gap to open up between the two countries’ interest rates. That would likely cause the Canadian dollar to weaken, putting further upward pressure on prices by making imports more expensive.

More important was a new set of findings that Kozicki shared about the sensitivity of Canada’s highly indebted households to higher borrowing costs. She said about three-quarters of mortgage holders have fixed rates, mostly in five-year terms, so about 20 percent renew in any given year. That means anyone who renews over the next two years will end up with lower payments, because interest rates were higher five years ago. Central bankers may worry less about stifling short-term demand and more about inflation. “We see that, on average, households appear to be in better financial shape now than they were at the start of our 2017-18 tightening cycle,” she said.

That cycle began with a quarter-point increase in July 2017. Policymakers then took a soft path, slowly raising the interest rate to 1.75 percent in October 2018, which was the highest it had ever been. they managed to get there. It’s safe to assume this time will be different.

• Email: | Twitter: carloskevin



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