In central banking parlance, there are, typically, three types of policy stances that a bank can embrace: hawkish (“Interest rates must go higher!”), dovish (“Interest rates must go lower!”) and neutral.
The Bank of Canada just adopted a fourth option. Neutral-ish.
A year after the bank signalled that it would begin a cycle of what turned out to be unrelentingly aggressive rate hikes (4.25 percentage points in 10 months), the bank on Wednesday declared an end to it. For now. With qualifiers.
“If economic developments evolve broadly in line with the forecast we published today, we expect to hold the policy rate at its current level while we assess the impact of the cumulative 425-basis-point increase in our policy rate,” Bank of Canada Governor Tiff Macklem said in a news conference Wednesday, echoing the words of the bank’s rate-decision announcement earlier in the day.
During the news conference, Mr. Macklem stressed – repeatedly – that this was a “conditional” pause to rate hikes, rather than necessarily an end. His senior deputy governor, Carolyn Rogers, took the emphasis of caution even further: She called the rate pause “very conditional.”
The condition, in a nutshell, is that the economy and inflation unfold more or less the way the Bank of Canada expects it to over the next year or two, as the bank outlined in new projections in its quarterly Monetary Policy Report, published at the same time as the rate decision. That would be a stalling but not imploding economy, a cooling labour market, and – critically – a retreat of inflation to below 3 per cent in the second half of this year, and around 2 per cent by late next year.
“If we start to see an accumulation of evidence that inflation is not coming down in line with our forecast, we’re prepared to raise interest rates further,” Mr. Macklem told reporters.
So what we have is a central bank that has shifted to a mostly, but not truly, neutral stance. It has expressed a desire to hold its policy rate steady, while stating that its bias is still tilted toward further hikes. Mr. Macklem was crystal clear that it’s way, way premature to even muse about rate cuts. That’s barely a far-off fantasy, let alone a monetary policy possibility.
Even after hearing Mr. Macklem and Ms. Rogers lay out their position, it’s difficult to know precisely how to read it.
One interpretation is that the bank is sold on a move to neutral, but wanted to give a mindful nod to the risks to the upside for inflation. With the inflation rate still north of 6 per cent, an upside surprise would be much more problematic for the bank than a forecast miss to the downside.
Perhaps it wanted to keep some uncertainty in place for financial markets, which are prone to overreacting at monetary policy pivot points. Maybe it simply wanted to gradually ease into a big change in policy stance – leaning toward a chance of more hikes now, before becoming more balanced down the road. Mr. Macklem has shown a propensity to moving policy in these sorts of measured steps in the past.
But given the emphasis that the bank’s leadership placed on the conditionality of the move, another interpretation would be that they’re not so sure we’re at the top for interest rates. Perhaps when they say that this is a pause while they get a better measure, we should take them at their word.
Regardless, it is a substantial policy shift. As Ms. Rogers explained in the news conference, up until now, the bank’s policy-setting Governing Council has been weighing “an accumulation of data” to tip the scales to justifying putting rate hikes on hold. From here, she said, it will require an accumulation of data “in the other direction” to end the pause and resume rate hikes. They need to be talked out of holding steady now, not talked into it.
Frankly, the Bank of Canada hasn’t had the best success forecasting inflation over the past couple of years (though they’re hardly alone on that front). And though the outlook looks more stable now than it did even a few months ago, there’s still enough uncertainty around inflation to justify building ample wiggle room into this policy shift.
Based on what the bank emphasized in the Monetary Policy Report, it would clearly feel more confident if the stubborn inflation in the services sector would ease up. It also remains nervous about wage growth, which “appears to have plateaued” in the 4- to 5-per-cent range – a pace that, if sustained, “is not consistent with achieving the 2-per-cent inflation target.” And Mr. Macklem said he would like to see inflation expectations retreat.
Until and unless the bank starts to see progress in those areas, the neutral-ish stance might be as good as we’ll get.
Still, for a country battered by 2022′s rate avalanche, we’ll take it – equivocations and all. Even a temporary reprieve from rate hikes will be welcome relief. And if the economic chips fall in the right places, we may have seen the last rate hike of this tumultuous cycle.