| It’s clear from Bank of Canada Governor Tiff Macklem’s latest speech that he wants to ease rates further but he’s still reluctant to signal it. That’s left us with the clunky line: “With further and more sustained evidence that underlying inflation is easing, monetary policy no longer needs to be as restrictive as it has been.” That’s an exact repeat of the line in the press conference last week where he also added that it was reasonable to expect further cuts, but only if inflation continues to ease. I take it as a flimsy commitment to continue to ease by a central bank that’s worried about getting burned. If not for the mistakes of the post-covid cycle, the Bank of Canada would have lowered rates much further by now but generals always fight the last war so being late was inevitable. I give them some credit for easing ahead of the Fed but the dynamics in the US and Canada are clearly different. Mortgages hit differently and the US fiscal picture is far more stimulative. US data is also clearly hotter. In the weeks ahead, we will see a picture of deteriorating data and it will be clear the Bank of Canada is behind the curve. An overnight rate at 4.75% is still very restrictive in an over-leveraged economy. Secondly, the speech touches on the probability of future supply shocks. The title is ‘navigating a new world’ and he says: “Looking ahead, technological change, geopolitical tensions, climate change, and shifting trade and investment flows all suggest we may experience more supply shocks than we did in the past.” What he’s saying here is that he’s worried about trade wars blocking the supply of critical components and about natural disasters or droughts knocking out factories or commodities. I’m not entirely sure that’s new but his comments suggest the reaction function to that will be to keep rates higher to snuff out inflation. That’s unwise and if it’s the case, it will compound the pain of these events. Mostly notably though, he listed ‘technological change’ at the front of his list. That’s telling because there is a very real scenario where generative AI wipes causes a massive increase in productivity but sends unemployment soaring. I think it will be the most-deflationary episode since the Great Depression. |
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