MNI INTERVIEW: Pre-Emptive BOC Talk Beats Moves-Ex Deputy Lane

It is still unclear whether the Bank of Canada will have to raise rates in response to an inflationary push from elevated oil prices or cut due to economic damage from U.S. tariffs, former deputy governor Tim Lane told MNI, adding that Governor Tiff Macklem had taken the right approach in talking tough but keeping his options open.

"Various things to watch, but it's not at the same time a reason to move in either direction," Lane said in an interview. "They're talking about tightening, but they're not actually doing it, and obviously talking about tightening can be a way of signaling to the public we're not going to let this get out of hand.” (See MNI INTERVIEW: Tough BOC Talk May Avoid Rate Surge- Beaudry)

While Macklem has said the current 2.25% policy rate is about right if oil prices moderate in coming months, he's prepared for "consecutive" hikes if inflation becomes entrenched, or, alternatively, easing if there are major new American tariffs.

Lane said officials are likely to be aware that consumer expectations are more sensitive to potential spikes in prices given memories of the burst of inflation after Covid lockdowns ended. This is especially the case with highly-visible gasoline prices, he added. (See MNI INTERVIEW: BOC Tilts Toward Hike This Year- Ex-Economist)

HARDER TO JUSTIFY

Investors see a hike later this year while most economists see no change.

Canada has more policy breathing room than the U.S. or Europe because inflation was slowing before the Middle East conflict as the trade war opened up slack, Lane said. The country's status as an energy exporter also gives consumers some cushion against higher oil prices, he said. 

"What they're currently doing, waiting and seeing, is appropriate," Lane said of Bank officials. "Given the sort of things could happen in either direction, it does tend to make it harder to justify moving pre-emptively."

Despite what Lane called "lacklustre" output and job markets, Canada avoided the recession that many economists projected last year after major tariffs took hold.

“We have been seeing more resilience in Canada than we expected, and there is a significant chance we could continue on that way,” Lane said, adding that worst-case scenarios are being avoided because U.S. President Donald Trump exempted the majority of Canadian products covered under the USMCA pact. 

"U.S. automakers say that you have to lay off workers and shut down plants because they were having to pay 30% more for parts from Canada," Lane said. "With that kind of thing going on, it was basically the recognition that the U.S. was really reliant on a lot of Canadian exports." 

KEEPING REALISTIC EXPECTATIONS

The Bank is preparing for its five-year mandate refresh due by December, and Lane noted that after its three core inflation measures had difficulty capturing the 2021 inflation jump, Canada might benefit from a less complicated measure. Time has shown there is no core measure that does well through every economic cycle so "the simpler the better," he said. 

Similarly, the Bank should avoid adding language about links between housing and monetary policy, in case that raises unwarranted public expectations, Lane said. "What would be good is if they have a thoughtful discussion of all those channels, but certainly I'd be surprised if they went further to actually try and put anything in the statement about suggesting the Bank was going to be trying to influence house prices or housing affordability or any of those things," he said.