Dropping a heavy hint

There's a bit of a tradition emerging at the Bank of Canada for the Governor to allow one of his senior deputies to make important policy statements. This started when Stephen Poloz was in the top job and Carolyn Wilkins was Senior Deputy Governor. In part the logic may be to showcase the deputy as a possible future Governor, though of course that did not work out for Ms Wilkins. But it may also be designed to give a kind of plausible deniability to the Governor: it may be less embarrassing to walk back a seemingly unambiguous policy statement if it is delivered by a deputy rather than by the boss himself.

This brings us to a speech last week by Deputy Governor Sharon Kozicki, delivered virtually to a conference in San Francisco, that has been widely interpreted as signalling a more rapid tightening of monetary policy.  Much of the speech dealt with Canadian household finances, but at the conclusion of her remarks Ms Kozicki addressed the policy outlook directly.  Some highlights:

With slack in the economy absorbed, we raised our policy rate to 0.5% in early March and said we expect it will need to rise further. We also said that we will be considering when to begin to allow the Bank’s holdings of Government of Canada bonds to shrink—a process known as quantitative tightening, or QT.

We were clear that the timing and pace of further increases in the policy rate, and the start of QT, will be guided by the Bank’s ongoing assessment of the economy and its commitment to achieving the 2% inflation target.

I expect the pace and magnitude of interest rate increases and the start of QT to be active parts of our deliberations at our next decision in April. The reasons are straightforward: inflation in Canada is too high, labour markets are tight and there is considerable momentum in demand......

The invasion of Ukraine is adding to inflationary pressures around the world and in Canada. This is primarily because it has caused global prices for oil and other commodities to surge. The result is inflation in the near term that is expected to be higher than we projected in January, when we published our latest projections. A key concern for us is the broadening of price pressures—around two-thirds of the components in the consumer price index are now exhibiting inflation above 3%. Persistently elevated inflation increases the risk that longer-run inflation expectations could drift upward.

..... it’s important to be clear that returning inflation to the 2% target is our primary focus and unwavering commitment. We have taken action and will continue to do so to return inflation to target, and we are prepared to act forcefully.

In the wake of these remarks, and particularly that final "forcefully", markets have been aggressively reassessing the outlook for rate hikes. A hike of 50 basis points is now almost the consensus expectation for the next rate setting meeting (April 13), with a cumulative rise of 225 basis points now expected by year end. bringing the rate target to 2.75 percent. 

This reassessment may have gone too far.  The Bank will want to be cautious about outpacing the Fed in the tightening cycle.  Rising global energy prices have pushed the Canadian dollar up by about two cents against the big dollar since the start of the year, and excessively rapid tightening would exacerbate that trend, harming the competitiveness of the non-oil sectors of the economy.  The Bank may well choose to send a strong signal with a 50 basis point hike in April, but after that, in this year of all years, expect its decisions to be highly data-dependent.