Despite all of the massive rate hikes unleashed on the economy by the Bank of Canada, the national inflation rate remained unchanged at 6.9% in October; the same level it was in September. If we consider the 7% inflation rate in August, a picture of stubbornly persistent inflation emerges. Three months of steady price growth is not healthy, and shows why the Bank of Canada has been so adamant in sticking with potent rate hikes. In recent media appearances and speeches, the Bank of Canada Governor Tiff Macklem made it clear that we’re not yet out of the “tightening phase” drawing to a close. The BOC believes that inflation will remain high for the rest of 2022, and they expect it to start “coming down” next year. There’s nothing super intellectual about that prediction. As we enter the peak of Christmas season, aggregate demand is going to rise and many retailers and businesses will add workers and increase hours to keep pace with shopping, and this will likely add inflationary pressures. This is what they tell us every year in any case!
In response to all of this, we continue to hear that more rate hikes will be necessary. Given that inflation hasn’t increased, which is very solid news, money market expectations are of a 25 basis point hike right before the year wraps up; at the Bank of Canada’s December 7th meeting. Some expect another 50 basis point increase, as we saw in October, but that is the minority view by far. The BOC is now increasingly voicing more concern over the potential of economic growth slowing down, especially in the fourth quarter. This is a telling admission given the sheer volume of shopping that is traditionally a buoyant at this time of year. A former Bank of Canada heavyweight has come out with strong warnings on the impacts of the rate hikes that we’ve seen. Former Bank of Canada Governor Stephen Poloz was recently interviewed and believes that the full effects of rate hikes haven’t been felt, and that they will be “even more powerful” than many anticipate.
Poloz was speaking at a conference hosted by Ivey Business School. He made the poignant observation that increased debt loads that have built up over the years makes the economy and the society more “sensitive” to higher debt costs today than in previous hiking cycles. Poloz defended his colleagues by agreeing that many of the underlying causes of inflation (commodity prices, external supply chain shocks) are and remain “transitory”. Poloz sees inflation coming down to 4% in the near future. Finally, the former BOC Governor emphasized that it will take time for higher debt servicing costs to fully weigh down on aggregate demand and on credit availability. Poloz’s comments echo the Bank of Canada’s anxieties over expectations of an deep economic slowdown preparing to bear down on the economy next year. 