MNI INTERVIEW: BOC Can Delay Hike To Neutral Til 2027-Mc Mahon

The Bank of Canada will keep borrowing costs at 2.25% through this year and tighten perhaps half a point to a neutral setting in 2027, giving companies time to adjust to damage from U.S. tariffs, a former Quebec finance ministry official told MNI. 

Core inflation is tame even with energy prices pushed up by the Iran conflict, while half of the consumer price basket is advancing at less than the Bank's 2% target according to Sebastien Mc Mahon, chief economist at iA Financial Group.

“That tells you all you need to know, that there’s no need for the Bank to hike anytime soon” said Mc Mahon, who has attended BOC staff roundtables and been surveyed ahead of federal budgets.

Governor Tiff Macklem held the overnight rate at 2.25% Wednesday and reiterated he could move to consecutive hikes if inflation becomes widespread or to lower rates if the U.S. imposes major new tariffs. Most economists see the Bank holding this year and hiking in the first half of 2027 while investors see a hike late this year.

LIP SERVICE

The Bank's talk of multiple hikes but a more limited scope to cut is a nod to the danger of inflation expectations ramping up and a commitment to avoiding the post-Covid price surge, Mc Mahon said. “They need to keep their forward guidance in because that’s what central banks do. They need to keep inflation expectations anchored, but it’s more lip service than anything else,” he said in an interview from Quebec City. (See: MNI INTERVIEW: Tough BOC Talk May Avoid Rate Surge- Beaudry)

Officials are in a favorable position after four cuts last year took the key rate to the bottom of the Banks' neutral range, Mc Mahon said, providing time to respond to both risks.

“The next move will be some sort of normalization up towards neutral, which is 2.75%,” he said. “You can also see reasons to cut but we think there is no need to in the short run.”

Canada's economy stalled the first quarter after shrinking at the end of last year but the main drivers were around gold imports and lumpy defense expenditures that obscured momentum in domestic spending, Mc Mahon said. 

LUXURIOUS POSITION

Governor Macklem said evidence so far does not point to a recession, a position Mc Mahon said is correct but also another way of signaling the tilt towards an eventual hike. “That does guide the markets that the odds of a hike are higher than odds of a cut, for sure, but I think it was being realistic, going with what the data was telling them,” he said.

Canada's economy is weak, which might make moving to neutral sufficient to keep inflation in check. The quality of the rebound depends on not just U.S. trade talks but the confidence businesses have in Mark Carney's efforts to boost investment, Mc Mahon said. 

“For the next year the most important indicator will be business confidence and business investment, because for Carney’s plan to work the private sector has to be behind it.”

“If things go wrong they have ample room to keep cutting, and if the Canadian economy gains some nerve, there could be some good reasons for inflationary pressures or you have an oil shock that becomes inflationary, then they can start hiking again without slamming the brakes on the economy,” Mc Mahon said. “They have put themselves in the position where they have that luxury to wait and see."