Wednesday's BoC decision a ‘slam dunk,’ says TD economist

The Bank of Canada is widely expected to hold its trend‑setting interest rate at 2.25% next week, despite a sharp jump in inflation linked to the US‑Iran conflict – and any future move is more likely to be a cut than a hike, according to a senior TD economist.

Derek Burleton, the bank’s vice president and deputy chief economist, told an audience at yesterday’s (April 23) Canadian Mortgage Brokers Association – Ontario (CMBA-ON) annual conference in Mississauga that the central bank has signalled clearly that it intends to “look through” the inflation shock caused by the geopolitical turmoil.

“The rate is at 2.25%. It’s been stuck there for a little while now. They’re at a level they’re kind of comfortable with,” Burleton said. “It’s the low end of what they call the neutral rate.”

The outbreak of the war in Iran at the end of February has sent oil prices sharply higher and spurred fears of a big inflation uptick in Canada and other economies.

On Monday, Statistics Canada said the annual rate of inflation increased to 2.4% in March, a climb that included the sharpest monthly rise for 14 months.

Burleton sees that figure inflaming even further – “maybe as high as 4%” – but said the Bank of Canada will likely be assuming that surge is short-lived, depending on how long the conflict lasts.

“The view is that would be a temporary shock as long as this war doesn’t drag [on] again. But who knows? I don’t think it can,” he said. “I just think that economic pain would grow too much, and we know the tendency of the [Trump] administration is to back off at that point.”

Why the BoC’s approach won’t be 2022 all over again

In June 2022, the annual inflation rate ballooned as high as 8.1% in Canada, sparked in part by an ultra-low central bank rate throughout the turbulence of the COVID-19 pandemic.

Then, the Bank responded by introducing a series of aggressive rate hikes, moving the policy rate as high as 5.0% (compared with its pandemic-era low of 0.25%) as it attempted to bring that rampant inflation under control.

But Burleton said he sees key differences between the current outlook and the economic environment that triggered hikes back then.

“In our view… we won’t see a shock to longer-term inflation expectations. Why? Because the economy is still soft,” he said. “It’s not 2022 again where they got behind the curve.”

Economists are largely united on the opinion that the Bank will decide against moving rates on April 29. It’s held steady in each of its last three decisions stretching back to December of last year, ending a run of two successive rate cuts in September and October.

For Burleton, it’s a surefire bet that the central bank will remain in wait-and-see mode as it assesses how the war is impacting the economy.

“Next week, they’re just going to say, ‘Look, we still see this as a short-term shock and we’ll look through it provided it doesn’t start to filter into longer-term inflation expectations,’ and that isn’t happening yet,” he said. “So next week is a slam dunk. No rate change, 2.25%.”

Don’t rule out a BoC cut at some point

The Canadian economy has sagged under the weight of US tariffs introduced last year, continuing to eke out modest growth and avoid a statistical recession but seeing a big negative effect in tariff-impacted industries.

The economy’s weakness, Burleton said, means despite plenty of chatter about potential Bank of Canada rate hikes, it’s actually more likely to move rates lower if it does decide a change is necessary.

“I do believe if the Bank is going to move off this, it’s more likely they cut rates than raise rates,” he said. “I think the bar for a rate hike is relatively high.”

Source CMP
By Fergal McAlinden