Source: Wikipedia Commons

By Michael O’Neill

Poor, poor pitiful Tiff. The Governor of the Bank of Canada is in a tug-of-war between doing what he believes is right and doing what Ottawa politicians want.

And Canadians will be collateral damage.

Today, the Bank of Canada (BoC) waffled and hiked the overnight rate to 3.75%, a 50 bp increase.

Most analysts and economists expected a 75 bp bump because recent data, the October 17 Business Outlook Survey, and BoC guidance suggested as much.

The July Monetary Policy (MPR) opening statement highlighted three reasons for a 100 bp rate increase. 1) “inflation is too high, and more people are worried that high inflation is here to stay.”  2) “the Canadian economy is overheated.” 3) “our goal is to get inflation back to 2% with a soft landing for the economy”.

That sounded like a plan

Today’s MPR statement gave almost identical reasons as July’s, but the rate hike was just 50 bps. 1) “inflation in Canada remains high and broad-based.” 2) “the economy is still in excess demand—it’s overheated”. 3) “higher interest rates are beginning to weigh on growth. This is increasingly evident in interest-rate-sensitive parts of the economy, like housing and spending on big-ticket items.”

The two MPR statements provide an extremely similar rationale for raising rates so why is the BoC tapering?

The Business Outlook Survey was weak. The BOS indicator fell 3.18 points to 1.69 which is the third worst performance, behind the pandemic and the Global Financial Crisis. Inflation expectations remained elevated which is supposedly a very concerning metric for the BoC.  A small majority of respondents believe a recession is likely.

Statistics Canada reported that the annual inflation rate ticked lower in September, falling to 6.9% from 7.0% in August. The drop was due to a lower gasoline price which if Opec has its way, won’t be going much lower. More importantly, it cost 11.4% more to buy food.

Perhaps he was spooked by political noise.

NDP Leader (and Trudeau puppet) Jagmeet Singh said “The aggressive sharp increase in interest rates does mean people are going to hurt. Put bluntly, it’s going to mean a very likely recession where hundreds of thousands of Canadians are going to lose their jobs.” He claims there is “absolutely no merit” to the rate hikes as Canadian wages have not kept pace with the surge in prices. Mr Singh is advocating that maximum employment be incorporated into the Bank’s mandate.

Conservative leader Pierre Poilievre is not a fan of Mr Macklem either. He is on record for saying he would fire Macklem for printing $400 billion for Trudeau to spend, which caused, what he referred to as “Justinflation.” A clever word but banned in the House of Commons.

Mr Poilievre is far from a financial wizard. He wanted to ban the BoC from creating a digital currency and in May was encouraging investments in crypto currencies. BTCUSD was $37,800 at the beginning of May and is $20,846.00 today.

At least he didn’t champion Turkey President Erdogan’s inflation strategy. Turkey’s central bank cut interest rates from 18.0% in September 2021 to 10.5% in October 2022 but instead of reducing inflation like Erdogan expected, CPI rose from 19.6% to 83.0% as of October 4.

The BoC decision is a head-scratcher.


Mr Macklem has vowed to get inflation down to its 2.0% target which may be difficult if the MPR forecasts are a guide. The MPR predicts GDP growth at 3.5% in 2022, higher than the 3.3% prediction in July, then dropping to 0.9% (July 1.8%) in 2023.

The BoC’s 2023 inflation forecast gives a favourable outcome as it is forecasts CPI will drop to 4.1% (July 4.6). Perhaps policymakers used a China National Bureau of Statistics model which tend to have a political bias.

Some analysts and economists have drunk the BoC Kool-ade. The are suggesting (like Mr Macklem did) that the tightening cycle end is near (but not there yet) with some predicting just a 25 bp hike in December.

If you are an investor that believes the BoC is close to its terminal rate, consider buying 5.0% GIC’s and jumping back into equities.

But before you do ask yourself the following:

1) is the risk for oil prices lower or higher? Opec cut production to shore up prices which suggests they have a “floor” price in mind. Meanwhile the sanctions against Russian energy are not going away any time soon.

2) Have supply chain issues been resolved or will they continue to be disrupted? China continues to lockdown cities at the first whiff of Covid. The world’s largest iPhone assembly plan in Zhengzhou is experiencing a small outbreak. It is still open but large parts of the city are locked down. Universal’s theme park in Beijing has been closed. The Xi Jinping covid policies will not go away since he secured another five-year term.

3) Do you trust the BoC to get it right? They never understood why inflation was low and missed all the early signs that inflation increases were a tad more than transitory.

It is far too early to declare the inflation battle won and that means it is too early to suggest the tightening cycle is ending.

Canadians need to keep a stack of wash cloths on hand because the problem with a tug of war is that the losers usually end up with a face full of mud.