Posthaste: Bank of Canada has 'one of the toughest jobs in financial industry this year,' TD says
TD Bank economists don’t envy the job facing the Bank of Canada, calling it “one of the toughest … within the financial industry this year” as the central bank faces pressure to correctly time the first interest rate cut since its historic hiking cycle peaked in July.
A new analysis from TD suggests that the Bank of Canada might have to start cutting rates before inflation comes down to its two per cent target to prevent the economy from running aground.
“The Bank of Canada won’t be able to wait until all the stars align before starting the process of normalizing interest rates,” said Beata Caranci senior vice-president and chief economist, and James Orlando, senior economist, at TD Economics, in an analysis released on Jan. 10.
Part of that celestial misalignment involves shelter inflation, which is “still running hot.”
Shelter costs in Canada rose 5.9 per cent year over year in November, according to the most recent inflation report, while mortgage costs were up 30 per cent year over year. On the other side of the ledger, the number of products experiencing inflation of less than three per cent continued to grow and “the share in outright deflation territory is also on the high side relative to the pre-pandemic period,” the TD economists said.
Among the challenges for central bank governor Tiff Macklem and his deputies will be to convince consumers that the rising cost of housing and financing mortgage debt is not representative of the whole inflation picture and corral household inflation expectations.
“The BoC will be forced down one of two paths: Fight shelter-fuelled inflation until the bitter end or recognize that growth/inflation dynamics will warrant rate cuts sooner rather than later,” they said.
Caranci and
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