Dependence on economic data is a fundamentally backward-looking approach, analysts warn
The inflation management strategies that the Bank of Canada and the US Federal Reserve are using seem to be working at the moment, although analysts are warning that these approaches might not be sustainable in the long term.
In Canada, the central bank’s policy is now at 4.75% after a 25-basis-point hike early June.
Multiple observers are anticipating yet another increase in next week’s policy announcement, as inflation continues to hover well above the BoC’s 2% target.
However, an approach that largely depends on the steady influx of economic data – which by definition will always be looking backward – betrays a central bank’s lack of confidence in its policy-making powers and tools.
“They don’t seem to have a lot of faith in their models, and they don’t seem to have a lot of confidence in their forecasts,” economist David Rosenberg said in an interview with BNN Bloomberg. “They’re flying blind.”
Ed Devlin, founder of Devlin Capital, agreed with the sentiment that central banks seem to be groping in the dark now – while maintaining that the rate hikes were still a sorely needed intervention.
“Does Tiff Macklem or Jerome Powell want to be the one who let the inflation genie out of the bottle? They’d rather go down as the one who caused the recession.”
Ted Rechtshaffen, president and CEO at TriDelta Financial, recently argued that the case for stopping further rate hikes is very strong at the moment. This is because removing mortgage interest costs from the equation will significantly pull down the latest consumer price index from 3.4% to 2.5%.
“Doesn’t this suggest that we are done taming inflation with interest rate hikes? After all, the Bank of Canada just did another interest rate hike in early June. How much more lagged impact is already ahead of us if inflation is already at 2.5%?
“Higher interest rates have already had a big impact on inflation and will continue to have an impact for some time to come. It is time for the Bank of Canada to stop raising rates now.”
