MNI BOC WATCH: Competing Growth, CPI Risk Keep Macklem Holding

Canada's central bank is seen keeping its policy interest rate at 2.25% Wednesday on a continuing mix of economic slack and inflation expectations that have held firm through the Iran conflict. 

All 27 economists surveyed by MNI see Governor Tiff Macklem holding the rate where it's been since October, which he views as the low end of the neutral range. Macklem at the June 10 decision signaled he could hike multiple times if high energy prices turn into broader inflation or cut if there are big new U.S. tariffs.

Macklem could well repeat his musing to reporters last time that little had changed among the balance of risks. Donald Trump on July 1 declined to renew the USMCA trade deal to set up another year of tariff negotiations and the frayed Iran ceasefire has left oil prices elevated but below records set after the conflict began in February.

Wednesday's decision comes with a new quarterly economic forecast and perhaps minor changes to the April view for 2026 GDP growth of 1.2% this yea and inflation of 2.3%. That combination creates what officials call a dilemma where any hike or cut brings risks of either letting inflation climb further or weakening an economy that stalled in the first quarter. 

READY TO BE NIMBLE

Macklem will benefit from continuing to tilt his remarks towards multiple hikes versus a cut to keep inflation expectations in check and avoid a repeat of the burst of prices after Covid lockups, former officials have told MNI. (See: MNI INTERVIEW: Pre-Emptive BOC Talk Beats Moves-Ex Deputy Lane)

Economists predict the Bank will hike twice in the first half of next year while investors see some chance of an increase late this year. Even with heavy tariffs on steel, aluminum and autos Canada's energy firms benefit from higher prices, while consumer and increased military spending are also seen adding to a rebound. (See: MNI INTERVIEW: Trade Delays BOC Hike Until Late 2027-Stillo)

As for the Bank's mandate of keeping inflation at 2%, core indexes have faded to about that mark in recent months while headline prices quickened to 3.2% in May from a year ago. Officials see CPI holding around 3% in coming months before easing back to target. 

Asked last time if the growth or inflation risk is bigger, Macklem quipped "both" and added what policy comes next “is less about the timeline, and more about the conditions.” The Bank's June decision said so far there's little evidence of pass-through but officials won't allow inflation to become widespread or entrenched and policy may need to be "nimble." 

MNI INTERVIEW: Fed Could Be Easing Before Year-End-Kroszner

Federal Reserve Chair Kevin Warsh could lead the FOMC to lower interest rates before the end of the year if energy-related inflation subsides fairly quickly and inflation expectations remain contained, former Fed board governor Randall Kroszner told MNI. 

“If inflation expectations stay very well anchored, and he can convince other people around the table on the timing and extent of the AI impact, I think they'll either be on hold or they will have a cut as the next action,”  said Kroszner, a professor at the University of Chicago Booth School of Business, in an interview. 

“Will it be in the next three months? No. Will it be potentially in the last part of the year or the beginning of next year? That's what I would say.”

Kroszner is quite sanguine on the inflation outlook, believing worries that U.S. tariffs would lead to global trade wars were overstated given U.S. leverage over energy markets. He is also heartened by the rapid decline in oil prices at the first hint of a resolution to the Iran war, and thinks the dampening effects from lower shelter costs on the inflation rate will continue. 

“I see the impact of the war in Iran as being something that could be interpreted more as a one-off. What we’ve seen is the incredible flexibility in energy prices. They did move up rapidly but when there was a ceasefire signed they fell to where they went pre-war,” he said.  

“So I don’t anticipate that there’ll be much pressure in the monthly inflation numbers starting in a few months and you will also have Kevin I think gradually convincing people that the AI productivity impact is not only real but substantial.” (See MNI INTERVIEW: Fed Will Be On Hold As Oil Shock Unwinds-Levy)

TASK FORCES

Kroszner is encouraged by the announcement of prominent economists and macro thinkers to Warsh’s five task forces, and by his already visible stamp on the Fed’s communications approach.

“These are all excellent well-known people who are very much independent thinkers and are not being drawn from one particular school of thought or point of view. This illustrates that Kevin is not trying to push one agenda but really trying to draw on the best thinking,” he said.

Kroszner said that revisiting key measures of inflation and which ones the Fed emphasizes is a legitimate exercise given large structural changes in the economy, and could lead to a renewed emphasis on trimmed-mean measures.  

COMMUNICATIONS BALANCE 

Warsh will have to strike the right balance between pulling back on forward guidance while still ensuring enough Fed communication to allow the market to properly price in the central bank’s reaction function. 

“Many economists think that having some form of guidance and having clarity in the reaction function helps to reduce volatility and potentially helps the markets do the work for the Fed or make it easier for the Fed to get to its goals because the market will know where it’s going and sort of move in that direction,” said Kroszner. 

“That said, the optimal amount of communication is not talking about every data point that comes out and having 15-20 people do that. Kevin really does feel that the Fed got itself into some hot water by making commitments that it couldn’t keep,” he added.

“A lack of clarity in communication about what the Fed was doing for monetary policy purposes versus crisis management, market function purposes was one of the things that got the Fed to buy far more assets than they otherwise would have purchased following Covid. And that dramatic growth of the balance sheet was a contributing factor to the high inflation that we had.”

MNI INTERVIEW: BOE Needs MPC Central Forecast In July - Aikman

The Bank of England should publish a central forecast reflecting the views of the Monetary Policy Committee regardless of uncertainty caused by the Iran war, National Institute of Economic and Social Research director David Aikman told MNI.

April’s Monetary Policy Report was only the second in which the BOE did not commit to a central forecast, instead delivering three scenarios conditioned on different paths for energy prices and second-round effects. In its July MPR, Aikman said the BOE would be better off going back to a market-rate-based central projection despite oil price volatility.

"Even though it's flawed, I think the ... current approach of conditioning on the market curve and using that as a signal as to whether the Bank thinks the market curve is kind of roughly right or a little bit too rich in some areas, is quite a good approach," Aikman, a former senior BOE official, said in an interview.

His call echoed comments by Chief Economist Huw Pill, who has said the shift away from central scenarios makes it harder for the Committee to reach a collective view. Aikman noted that a recent speech by another MPC member, Alan Taylor, also stressed that the last time the BOE omitted a central scenario, in May 2020 when the economy was effectively shuttered by Covid, it produced a single “illustrative scenario” instead. (See MNI: BOE Needs More Varied Scenarios - Bean, McMahon)

There is "an implicit desire in [Taylor's] speech to return to a central forecast, which I fully agree is what the MPC should be trying to do," Aikman said, adding that "you need to have a forecast that people can buy into."

Governor Andrew Bailey has previously talked about the Bank moving to a staff-led forecast but Aikman believes this would, on balance, be a mistake. 

"Is the forecast an input into the policy process, in which case a staff forecast might work, or is it an output? ... Is it the MPC communicating its view on the outlook through the lens of the forecast? Now, traditionally, it's been both," Aikman said.

The committee should avoid a dynamic where they publish a staff forecast they disagree with, he added, as this would be "potentially misleading."

MARKET RATE PATH DISTORTIONS

While the MPC has traditionally conditioned its central forecast on a market rates curve, this has recently deviated significantly from  analysts' expectations, with the former implying markedly more tightening. While Taylor said the Bank's market rates-based forecast "inherits those distortions," Aikman is wary of replacing it. (See MNI INTERVIEW: UK Inflation Expectations More Loosely Anchored)

"Even if there is a set of risk premia in the OIS curve, you can't just ignore them. That is actually something that's affecting what it costs you to get a mortgage ... those risk premia need to be taken into account in the forecast," he said.

Ditching the OIS swap curve would raise additional complications, Aikman added.

"The forecast isn't just conditional on the market curve for interest rates. It's conditional on exchange rates, on equity prices, on every other bit of financial condition you can imagine [and] all of those other prices in the economy are effectively consistent with the market curve,” he said. (See MNI: Calls For BOE To Be Clearer On Financial Conditions)

"As soon as you step away from conditioning on the market curve, you have to work out what you're going to do with all of those other asset prices, because if you told me, 'well, interest rates are actually going to fall over the next three years rather than increase as the market curve has got,' then presumably you'd have a lower value of sterling and you'd have a bigger stock price. So you'd have to endogenously work out a different set of paths, which is not a simple thing to do.”

MNI INTERVIEW: Fed Could Soon Lean Toward Rate Hikes-Giannoni

Federal Reserve officials are increasingly worried about high inflation and could start thinking about hiking rates soon if price pressures do not ebb, former Dallas Fed research director Marc Giannoni told MNI. 

“If inflation does not come down as we would expect and as the FOMC is expecting, then they will need to make some adjustments, then I would imagine they hike,” said Giannoni, now chief U.S. economist at Barclays, in an interview. 

He still thinks the most likely outcome is for the Fed to remain on hold until the end of 2027, but sees a “narrow path” to avoiding rate increases given the elevated inflation figures. (See MNI INTERVIEW: Fed Right To Hold Off On Hikes For Now - Keen) 

HAWKISH DISSENTS

Indeed, he noted the possibility of hawkish dissents as early as the July meeting, given sentiments expressed in minutes to the June decision.

“It’s quite possible. We had participants saying they would have favored a hike as early as June. They could get along with a hold, but if they were left to their own devices they would have preferred to hike. Those individuals will almost surely want to hike again in July,” he said.

The only thing FOMC members need to nudge them away from a wait-and-see stance and into hiking mode, Giannoni said, is for inflation to appear to be settling well above target rather than following the gradual decline officials expect after an energy-related bump. “If that does not happen, we are pretty close to having them switch to hikes earlier." 

While inflation pressures have been exacerbated by tariffs and the Iran war, Giannoni said the outlook for prices was not favorable even before the start of the conflict. 

The most important inflation surprise of the year has been the boost to prices from an ongoing boom in AI investments, which might eventually become disinflationary but right now is working in the opposite direction, he said. 

“The biggest risk and the biggest factor to us that affects PCE prices is this inflation in categories like software and computer accessories, which is related to the AI investment boom, the huge demand for chips and memory and things of that sort,” he said. 

COMMUNICATIONS VACUUM

Giannoni, also a former New York Fed staffer, said he welcomed some of Chair Kevin Warsh’s changes to communications, but hopes he does not take central bank circumspection a step too far, leaving financial markets to guess how the Fed will react to incoming data. 

A much shorter policy statement, for instance, is a welcome change, he said. Warsh’s critiques of shortcomings in the Summary of Economic Projections are also justified. 

“I think the dot plot has long been recognized as having flaws, in particular because it presents a simple projection by each individual under a certain scenario that can be completely different across individuals,” he said. 

That doesn’t mean it should be jettisoned, but rather replaced with something that offers more clarity and information rather than less, he added. “Moving away from that without having a good replacement, I think would be very problematic.”

At the same time, Giannoni would like the new chair to offer more detail both on how he is thinking about the current state of the economy as well as some hints of the Fed’s reaction function under his tenure. 

“This idea that somehow financial markets are going to derive pure signals about the economy and its future when they don’t get that communication at the central bank – it’s a risky operation,” he said. “Market participants have no choice but to form expectations about what the Fed is going to do. If the Fed doesn’t say anything, then you go by what you have, and you may misinterpret what they say.”

MNI POLICY: Weak Yen Adds Risk To BOJ's Policy Direction

Bank of Japan officials are concerned that only a weaker yen will persuade Prime Minister Sanae Takaichi that further rate hikes are necessary, but if markets begin dictating monetary policy, the eventual tightening cycle could prove steeper than if the BOJ responded primarily to economic and inflation developments, MNI understands.

Over time, if Takaichi's government remains in power, it is expected to appoint more reflationist members to the Policy Board and senior leadership, gradually shifting the BOJ's policy stance. However, this is a long-term process.

A weaker yen and rising government bond yields driven by the market's inflation and fiscal concerns could make further BOJ tightening politically acceptable. However, the Bank risks raising rates further than otherwise necessary if it is forced to tighten mainly in response to market pressure.

Such market-driven tightening is particularly problematic because it may fail to halt further yen weakness while locking the Bank into an unwanted policy path.

Nevertheless, the BOJ believes it must continue raising the policy rate as upside risks to inflation increase to avoid falling behind the curve. At its June meeting, the Bank also highlighted the risk that underlying CPI could overshoot its 2% target, signalling that the pace of tightening could accelerate if necessary. (See MNI POLICY: Weak Yen Stokes Concern; Govt Clouds Rate Path)

A rate increase implemented against the government's wishes would also strain relations between the BOJ and the administration, add to market volatility and ultimately influence future appointments.

Governor Kazuo Ueda's five-year term, along with those of both deputy governors, expires in April 2028. Market participants have discussed former Deputy Governor Masazumi Wakatabe and former Executive Director Tokiko Shimizu as potential candidates for governor or deputy governor, with some also viewing Shimizu as a possible successor to Ueda.

Wakatabe serves on the Council on Economic and Fiscal Policy, a government advisory panel that recently called for "appropriate monetary policy."

The five-year terms of hawkish Policy Board members Naoki Tamura and Hajime Takata also expire in July 2027, giving Takaichi the opportunity to appoint more reflationist successors.

GOVERNMENT'S RIGHT TO DELAY

Takaichi also has the authority to postpone a policy decision until the next meeting, making such intervention more likely when the BOJ is preparing to raise rates. Ahead of tightening, the Bank typically sounds out the government's position through informal communication to avoid unnecessary confrontation at the policy meeting.

Ueda's June 3 speech to business leaders, which strongly signalled a June rate hike, followed his May 22 meeting with Takaichi, leading some observers to conclude he had secured the government's tacit approval before the June 15-16 policy meeting.

If the BOJ continues this approach, however, meetings between Ueda and Takaichi ahead of policy meetings could themselves become policy signals. To avoid creating that impression, such meetings may eventually need to take place before every policy meeting, regardless of whether the BOJ intends to change rates.

The difficulty is that bilateral meetings take place after Ueda or a deputy governor has delivered a speech strongly signalling a near-future rate hike. Once the BOJ has sent such a policy signal, reversing course becomes difficult even if Takaichi opposed the move at the subsequent meeting. Failing to follow through after clearly signalling a rate increase would undermine the BOJ's credibility and risk destabilising financial markets.

MNI INTERVIEW: Trade Delays BOC Hike Until Late 2027-Stillo

The drag from U.S. tariffs remains the key risk for Bank of Canada policymakers, likely delaying any rise in interest rates from Governor Tiff Macklem until late next year despite the inflation threat from higher oil prices, a former official from the country's largest province told MNI.

U.S. President Donald Trump's failure to renew the USMCA pact on July 1 and opt for annual reviews puts more focus on damage to Canada's exports and investment says Tony Stillo, former forecasting manager at Ontario’s finance ministry now at Oxford Economics. The Iran conflict remains a risk but has yet to disrupt long-term inflation expectations Macklem has focused on as a condition for hikes  Stillo says.

“Slack in the economy is one of the reasons you're not going to see inflation get out of hand, even with the what we've seen to date with oil prices,” Stillo said. (See: MNI INTERVIEW: Carney-Trump Deal Will Include Tariffs-Chamber)

Growth and the labor market will remain weak through this year while business activity shows a mix of gains in commodity firms and more hesitation to spend by firms linked to U.S. trade, he said. Before the levies on steel, aluminum and autos, three-quarters of Canada's exports went to the United States.

POLITELY COMMUNICATING

Macklem's last rate decision said significant new U.S. penalties could require a cut to the 2.25% rate, but also that if inflation spreads beyond energy prices he may need consecutive hikes.

“They're politely communicating that monetary policy is caught in a bind -- they use the word dilemma -- because they can't address the dual factors at play in both the Iran-U.S. conflict and its fallout for higher prices and weaker economy. The same thing with what could happen with a trade deal,” Stillo said.

That wide range of guidance matches the unusual times the economy is in, and Stillo said officials will remain guarded even when the economy starts taking a clear direction. (See: MNI INTERVIEW: BOC Can Delay Hike To Neutral Til 2027-Mc Mahon)

“I don't think they'll just say that we're moving towards this,” he said. "They don’t want to be burned, and I think they're going to be prepared to still say, you know, we're living in uncertain times.”

EASING BIAS

“The worst scenario for Canada or any country globally is a poly-crisis, where all of these things happen all at once. That's where you really get some turbulence, to say the least.” 

In a scenario without a long rate hold, Stillo's view is the cut scenario is more likely because of the slow recovery from the tariff hit. 

“I think there's an easing bias,” he said. “The Bank is going to be nimble and respond to whatever the economy needs. They're in a reasonable place now.”

“Hopefully the Iran situation is largely contained, but that's why they were saying we could hike if we need to. If that's what the economy needs for stable prices and stable inflation and the best for the economy overall, then they'd hike.”

MNI INTERVIEW: Trade Delays BOC Hike Until Late 2027-Stillo

The drag from U.S. tariffs remains the key risk for Bank of Canada policymakers, likely delaying any rise in interest rates from Governor Tiff Macklem until late next year despite the inflation threat from higher oil prices, a former official from the country's largest province told MNI.

U.S. President Donald Trump's failure to renew the USMCA pact on July 1 and opt for annual reviews puts more focus on damage to Canada's exports and investment says Tony Stillo, former forecasting manager at Ontario’s finance ministry now at Oxford Economics. The Iran conflict remains a risk but has yet to disrupt long-term inflation expectations Macklem has focused on as a condition for hikes  Stillo says.

“Slack in the economy is one of the reasons you're not going to see inflation get out of hand, even with the what we've seen to date with oil prices,” Stillo said. (See: MNI INTERVIEW: Carney-Trump Deal Will Include Tariffs-Chamber)

Growth and the labor market will remain weak through this year while business activity shows a mix of gains in commodity firms and more hesitation to spend by firms linked to U.S. trade, he said. Before the levies on steel, aluminum and autos, three-quarters of Canada's exports went to the United States.

POLITELY COMMUNICATING

Macklem's last rate decision said significant new U.S. penalties could require a cut to the 2.25% rate, but also that if inflation spreads beyond energy prices he may need consecutive hikes.

“They're politely communicating that monetary policy is caught in a bind -- they use the word dilemma -- because they can't address the dual factors at play in both the Iran-U.S. conflict and its fallout for higher prices and weaker economy. The same thing with what could happen with a trade deal,” Stillo said.

That wide range of guidance matches the unusual times the economy is in, and Stillo said officials will remain guarded even when the economy starts taking a clear direction. (See: MNI INTERVIEW: BOC Can Delay Hike To Neutral Til 2027-Mc Mahon)

“I don't think they'll just say that we're moving towards this,” he said. "They don’t want to be burned, and I think they're going to be prepared to still say, you know, we're living in uncertain times.”

EASING BIAS

“The worst scenario for Canada or any country globally is a poly-crisis, where all of these things happen all at once. That's where you really get some turbulence, to say the least.” 

In a scenario without a long rate hold, Stillo's view is the cut scenario is more likely because of the slow recovery from the tariff hit. 

“I think there's an easing bias,” he said. “The Bank is going to be nimble and respond to whatever the economy needs. They're in a reasonable place now.”

“Hopefully the Iran situation is largely contained, but that's why they were saying we could hike if we need to. If that's what the economy needs for stable prices and stable inflation and the best for the economy overall, then they'd hike.”