Posthaste: Why some economists think the Bank of Canada is about to make a mistake

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Photo by HYUNGCHEOL PARK/PostmediaTHIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLYSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.SUBSCRIBE TO UNLOCK MORE ARTICLESSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.REGISTER / SIGN IN TO UNLOCK MORE ARTICLESCreate an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.THIS ARTICLE IS FREE TO READ REGISTER TO UNLOCK.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountIt’s been awhile since there’s been this much drama around a Bank of Canada rate decision.Just a few weeks ago the central bank was widely expected to hold fire on interest rates for the rest of the year. Then governor Tiff Macklem spoke from the sidelines of an International Monetary Fund meeting and something shifted.Macklem said higher energy prices from the Iran war were boosting economic growth and increasing the risks of higher inflation ahead. This followed a more hawkish tone from the bank since early September.This advertisement has not loaded yet, but your article continues below.His comments pushed markets to increase their bets to 76 per cent that the bank would raise its policy rate to 2.5 per cent this Wednesday and convinced many of the country’s top economists to change their calls.Breaking business news, incisive views, must-reads and market signals. Weekdays by 9 a.m.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Posthaste will soon be in your inbox.We encountered an issue signing you up. Please try again“We can’t see why Macklem would have hastened to make these comments at the IMF meeting, just before the Bank’s media blackout, other than to signal an October hike,” said CIBC’s chief economist Avery Shenfeld in a note.Their calls may have changed, but not their minds.Royal Bank of Canada chief economist Frances Donald said her team’s expectation of a rate hike Wednesday is not because they think there is a need for such a move, but because of policymakers’ recent communications.In RBC’s view “the case for patience is strong.”They see no evidence that higher energy prices are bleeding into broader inflation and though the Canadian economy is improving, it is still not strong. The housing market is stuck in a downturn and gross domestic product data out this Friday should confirm that growth slowed in the third quarter.RBC also argues that bond yields that have risen more than 40 basis points over the past three months have already done some of the central bank’s work in tightening financial conditions.This advertisement has not loaded yet, but your article continues below.Shenfeld said CIBC would “respectively beg to differ” with a rate hike if the central bank decides to go that way tomorrow.“Our worry that this could be a policy error is tied to the fact that we aren’t yet sure that ANY rate hikes will be warranted in the coming year, so moving early could be a step that the Bank comes to regret,” he wrote.“The risks of waiting, in contrast, appear to be more limited.”The weeks after the U.S. mid-term elections in November could resolve many of the uncertainties now facing the Canadian economy regarding energy inflation and trade relations, he said.The U.S. could reach a post-election deal with Iran that lowers oil prices. There is also a chance that trade tensions get worse, in which case the Canadian economy would need the support of lower interest rates.David Rosenberg, president of Rosenberg Research & Associates Inc., makes no bones about it. He finds it “astounding” that markets are pricing in a rate hike Wednesday as a “virtual certainty” and upping the odds of another move in December.Rosenberg argues that the Bank of Canada has no control over imported inflation from higher energy costs, and cautions that the economy could end “up being the sacrificial lamb in this senseless fight against inflation that has zero to do with the state of domestic demand.”This advertisement has not loaded yet.This advertisement has not loaded yet, but your article continues below.“By piling on this cost shock with rate hikes, the recession that we did not get when we were supposed to back in 2021 and 2022 will emerge as a primary risk for 2027,” he said.Six of the seven members of the C.D. Howe Institute’s monetary policy council, which includes economists from Canada’s largest banks, called for the Bank of Canada to holds it rate at 2.25 per cent tomorrow.“Members saw little evidence of broader price pressures and, from that perspective, found it difficult to make the case for a hike, which most did not,” said the institute.Sign up here to get Posthaste delivered straight to your inbox.Curious about what’s been driving the Canadian dollar lately?This chart by National Bank of Canada shows the forces whipsawing the loonie. After months in negative territory, the loonie’s correlation with oil recently turned positive, said National Bank senior economist Kyle Dahms. But that influence remains weak compared with gold and two-year yield spreads.Expectations of a Bank of Canada rate hike tomorrow and a Federal Reserve hold has helped reverse some of the currency’s earlier losses, but its recovery is vulnerable to changes in rates and commodities, he said.This advertisement has not loaded yet, but your article continues below.National Bank remains cautious on the Canadian dollar for the rest of this year. Appreciation will depend on the easing of trade tensions and narrowing of Canada’s yield disadvantage.Today’s Data: United States durable goods orders, new home sales and building permitsEarnings: The Boeing Co., The Coca-Cola Co., PayPal Holdings Inc., Visa Inc., Robinhood Markets Inc., CenterPoint Energy Inc.A Montreal woman who is recently divorced with a young son wonders how she can save for retirement and her child’s eduction. Her three-bedroom townhouse is fully paid off, she earns $145,000 annually and receives $550 monthly in child support. Find out what FP Answers recommends.Interested in energy? The subscriber-only FP West: Energy Insider newsletter brings you exclusive reporting and in-depth analysis on one of the country’s most important sectors.Are you worried about having enough for retirement? Do you need to adjust your portfolio? Are you starting out or making a change and wondering how to build wealth? Are you trying to make ends meet? Drop us a line at wealth@postmedia.com with your contact info and the gist of your problem and we’ll find some experts to help you out while writing a Family Finance story about it (we’ll keep your name out of it, of course).This advertisement has not loaded yet, but your article continues below.McLister on mortgagesWant to learn more about mortgages? Mortgage strategist Robert McLister’s Financial Post column can help navigate the complex sector, from the latest trends to financing opportunities you won’t want to miss. Plus check his mortgage rate page for Canada’s lowest national mortgage rates, updated daily.Financial Post on YouTubeVisit the Financial Post’s YouTube channel for interviews with Canada’s leading experts in business, economics, housing, the energy sector and more.Today’s Posthaste was written by Pamela Heaven with additional reporting from Financial Post staff and Bloomberg.Have a story idea, pitch, embargoed report, or a suggestion for this newsletter? Email us at posthaste@postmedia.com.Bookmark our website and support our journalism: Don’t miss the business news you need to know — add financialpost.com to your bookmarks and sign up for our newsletters hereThis advertisement has not loaded yet.Notice for the Postmedia NetworkThis website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.