MNI INTERVIEW:BOC Idle Rest Of Yr Despite Cut Talk- Ex Staffer

Canada's central bank is staying on hold for the rest of the year because trend inflation remains elevated, a former senior BOC and finance department official told MNI, even with the Governor saying a cut is possible if the U.S. trade war slows price gains.

“They're not doing anything because core inflation is picking up,” Jean-François Perrault said in an interview Wednesday after Tiff Macklem held the key rate at 2.75% and said a cut may be needed if growth and inflation slow. (See: MNI BOC WATCH: Hold And Potential Cut If CPI And Growth Slow)

The mention of a potential cut is "opportunistic," Perrault said, given officials said trend inflation has quickened to about 2.5% from a pace of around 2% late last year. 

“If growth slows as it has or maybe slows further there still is the underlying question of inflation here, and that's one of the things I think the governor wasn't super clear about” said Perrault, now Scotiabank's chief economist. Before that he was assistant deputy minister at Canada's finance department and assistant chief at the BOC's domestic analysis branch.

THINGS CAN GET SCARIER

The central bank's middle scenario for growth of just 1.1% next year appears understated given Prime Minister Mark Carney's push for faster approval of major projects, said Perrault, who recently attended a private roundtable with Carney's finance minister. Francois-Philippe Champagne has delayed a budget until the fall that will likely also show more deficit spending on the military and infrastructure. (See: MNI: Canada Approved CAD95B Geopolitical Contingency Borrowing)

Much of the data since the previous decision showed a resilient economy, Perrault said, a view the Bank also touched on. Still, five of 10 economists tracked by MNI that updated their view Wednesday see one cut later this year.

The Bank's decision came two days before U.S. President Donald Trump's deadline for a trade deal before he intends to impose 35% tariffs. Even in dire scenarios inflation pressures may increase because of retaliatory tariffs, Perrault said. Inflation expectations are already elevated and it's unlikely that even slower growth will drive inflation down, he said. 

BOC staff generated three different economic scenarios based on the trade war's intensity and the status quo projection showed core inflation at 3.1% in the third and fourth quarters. That's outside the Bank's target for headline inflation of 1% to 3%, setting up trouble again if inflation is sticky like it was after Covid lockdowns. 

“The resolution that sees tariffs applied more broadly against Canada, where we retaliate, presumably there would be retaliation; that’s the scenario where inflation is scarier,” Perrault said.