BoC ‘facing major dilemma’ on rate hike timeline: CIBC’s Tal

Michelle Zadikian, BNN Bloomberg

The Bank of Canada has some difficult realities to weigh ahead of its Jan. 26 interest rate decision.

On one hand, the central bank’s latest Business Outlook Survey highlighted how concerns are continuing to mount in the business community about prolonged inflation. On the other hand, the Canadian economy is dealing with tighter lockdowns to curb the spread of the Omicron COVID-19 variant.

“That’s a major dilemma” for the Bank of Canada, according to Benjamin Tal, deputy chief economist at CIBC Capital Markets.

“We are in the middle of the winter. Omicron is still with us. It will be with us throughout the winter. So if you’re the Bank of Canada – do you want to start raising interest rates in the middle of this madness?” Tal said in an interview on Monday.

“At the same time, the business community is telling you to start moving.”

The Bank of Canada’s sole mandate is to keep inflation within a range of one to three per cent, and Governor Tiff Macklem has said he’s willing to let inflation run hot for a short period of time. But consumer prices have now been rising above the central bank’s target for nearly a year, posing a threat to its credibility.

Two-thirds (67 per cent) of firms that responded to the Business Outlook Survey reported that they expect inflation to continue above three per cent over the next two years.

Tal said he would like to see the Bank of Canada hike rates at its meeting next week, but believes the central bank will choose to wait until March or April instead, because of what it could mean for the economy.

“Remember, the economy will go south a bit. We’ll see employment not rising rapidly because of Omicron, we’ll see the economy slowing down the way we saw in the first quarter of last year. So I’m not sure that they are ready to start raising interest rates now,” he said.

One soft point in the Canadian economy, especially compared to the U.S., has been wage growth, despite the current labour shortage.

The latest data from Statistics Canada shows wages rose 2.7 per cent in December year-over-year, falling short of expectations of a 3.2 per cent increase.

However, Tal said he thinks wages could start to show more meaningful growth in the coming months since some workers might see salary increases take effect in January.

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