MNI INTERVIEW: BOC Tilts Toward Hike This Year- Ex-Economist

Canada's central bank is more likely to tighten policy later this year if oil prices stay high and a domestic rebound from U.S. tariffs takes shape, although a neutral monetary stance and slowing inflation before the Iran conflict make a hold the most probable outcome, a former staff economist told MNI.

“Beyond my base case of them holding, I put more weight on them gradually raising rates on worries about demand-side inflation,” said Ali Jaffery, a former principal economist in the Bank of Canada's international department now with KPMG.

Governor Tiff Macklem left the overnight rate at 2.25% Wednesday saying that's about right if oil prices follow futures markets and decline over the next year, while adding multiple hikes may be needed if inflation persists. Slack allows officials to look through the first round of energy price increases and a lower rate may be appropriate if there are major new U.S. tariffs, he also said.

“If I were them I’d do the same: I’d want to maximize my options without making any major commitments,” Jaffery said.

A GOOD PLACE

“They are in a good place,” he said. That's because inflation was near the 2% target for a while before the Middle East conflict and the policy rate was about neutral. 

“If they need to move they will move, but I think given where they are they will probably move more slowly than other central banks,” Jaffery said. Any resolution of the Iran conflict in the near term makes a hold through 2026 much more likely, he said.

Bond markets signaling the Bank hikes several times this year reflect global concerns and short-term swings in Iran talks rather than the likely BOC path, Jaffery said. (See: MNI INTERVIEW: BOC Inflation Patience Is Warranted- IMF Rep)

Similarly, the Bank's actions are more likely guided by real-time events rather than the Monetary Policy Report's baseline forecast, he said.

SLOW BURNING SHOCK

“I would be more surprised if they cut rates. I wouldn’t put much weight on that,” Jaffery said. 

Canada's optimistic scenario sees the economy picking up late this year as federal and provincial government deficit spending boosts investment, and U.S. President Donald Trump responds to voter pressure around tackling the cost of living before midterms, Jaffery said. 

“There’s also some possibility the Trump administration cuts its losses and says we’re not going to attack Mexico and Canada, and let’s have some horse-trading on some minor issues," he said. "I could see Canada’s growth as pretty strong by the end of the year.”

Big rate hikes would endanger that scenario because some industries are suffering from tariffs, Jaffery said. “It is a slow burning shock, which is why I think central bankers have to be careful, because the healing process is going to take time.”