© Bloomberg. Tev McClem.
(Bloomberg) — If concerns about an overheating economy aren’t enough of a problem, Bank of Canada Governor Teff McClem enters a crucial six-week phase in his fight against inflation with an unexpected new problem: questions about his credibility.
The 60-year-old central bank governor has been targeted by prominent politicians from the opposition Conservative Party, who question his commitment to the fight. And while most economists and critics have dismissed the criticism as absurd, the attacks come at a tense time.
The Bank of Canada is in the midst of a shock and awe campaign to bring down inflation in hopes of boosting public confidence that it is taking the problem seriously. The more credible the central bank, the more price expectations are kept in check – and the higher the chances of a quiet downturn.
MacLeam is expected to achieve three consecutive increases of half a percentage point over three months. The first huge rally took place in mid-April, the second rally is likely to take place later this week, and the third rally is likely to take place in the first half of July.
“If Teff is concerned about his credibility, he will probably have to – and that’s the unfortunate thing – maybe he will have to exaggerate the rate hikes and take more risk,” Chris Ragan said. The director of the McGill University School of Public Policy in Montreal said by phone.
The bank’s benchmark interest rate, which started the year at a record low of 0.25%, is expected to reach 2% at its July 13 meeting. It is an initial load of violence aimed at persuading households and businesses that the inflationary boom will not last, before they begin to reset upward wage and price expectations.
Markets seem convinced that Maclem will be successful.
After the three massive moves, the Bank of Canada is expected to slow the pace of tightening. After that, three or four additional hikes are priced in, but each quarter points and policymakers are holding on to around 3%.
This is a far cry from what is currently seen as a high “contractual” rate – which means there is no need to orchestrate a sharp slowdown to contain price pressures or restore central bank credibility.
What Bloomberg Intelligence says…
We believe the risks are to the upside. The Bank of Canada is likely to update its inflation forecast further in July. If price pressures persist in the third quarter, it may be difficult for the central bank to pause in the second half, but it is certainly possible to move to 25 basis points.”
— Angelo Manolatos, Senior Associate Analyst, and Era Jersey, Senior US Pricing Strategist
For the full analysis, click here
There is also no worrying data yet in the data suggesting that the central bank is too late to plan for a small drop. Average wage growth accelerated to just over 3%. This is still well below inflation, which was 6.8% in April, and not much higher than what would be considered normal in times of no crisis anyway.
The pace at which companies expect price increases has also stabilized in recent months, according to monthly surveys by the Canadian Federation of Independent Business – a reassuring sign.
But as McClem himself quipped in a speech a decade ago, credibility is hard to gain and easy to lose. This is why the central bank takes no risks and cuts interest rates to neutral as quickly as possible. The current key rate is still very catalytic.
Finally, it became clear – at least in hindsight – that the Bank of Canada gave the economy more stimulus than was necessary and pulled out too late. While it would be an exaggeration to blame Maclem for much of Canada’s current inflation, which is being driven by global factors, policy makers know they have been fueling price pressures and a housing bubble.
The quick course correction comes because officials want to avoid any impression that they are becoming more inflation-friendly.
McClem’s recent admission that some mistakes have been made in response to the Covid-19 crisis was part of that. mea culpa serves one purpose: to reassure Canadians that the price hike was not intentional.
If anything, the political attacks will precipitate what will likely be a years-long autopsy of Canada’s stimulus efforts during the pandemic – by the Bank of Canada and Prime Minister Justin Trudeau.
This is not a bad thing, and the central bank appears to be open to discussion.
“Tough questions, additional scrutiny, and informed debate are all appropriate in the current environment,” Deputy Governor Carolyn Rogers said in a speech this month.
An autopsy is likely to include whether the central bank has strayed too far from its core mandate, a debate many economists have welcomed.
Before the pandemic, there was a loss of trust between the central bank and governors, and this is an untenable situation for an institution whose effectiveness depends on credibility.
Recently, Conservative Party leader Pierre Boliever announced that he would fire McClem if he ever took power, which is a possibility.
While most dismiss the 42-year-old lawmaker’s rhetoric as gossip, it’s also not hard to find concerns that the central bank has lost focus on inflation and may have been too accommodating to policy. It’s a debate happening in other countries as well, including increased scrutiny by the Bank of England and the Federal Reserve.
In Canada, look no further than the central bank’s extension of its inflation targeting mandate last year, which many found politically uncomfortable. Rajan and other economists have complained that the introduction of terms relating to maximum employment and climate change was apparently written by the office of Treasury Secretary Chrystia Freeland rather than Bank of Canada officials.
“The answer is to cut inflation,” William Robson, CEO of the CD Howe Institute in Toronto, said by phone. “If inflation remains high, this problem will not go away, no matter what we think of Pierre Boulevard.”
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