In the coming weeks, we will see a picture of deteriorating data and it will be clear that the Bank of Canada is falling behind the curve. The overnight interest rate of 4.75% is still very restrictive in an over-leveraged economy.
It's clear from Bank of Canada Governor Tiff Macklem's recent speech that he wants to ease interest rates further but is still reluctant to signal this. We left this with the heavy line:
“With additional and more sustained evidence that core inflation is declining, monetary policy no longer needs to be as restrictive as before.”
This is an exact repeat of the line from last week's press conference where he also added that it is reasonable to expect further cuts, but only if inflation continues to decline.
I view it as a weak commitment to continued easing by a central bank that is worried about getting burned. If it weren't for the mistakes of the post-Covid cycle, the Bank of Canada would have cut rates further by now, but generals always fight the last war, so a delay was inevitable.
I give them some credit for easing before the Fed, but clearly the dynamics in the US and Canada are different. The impact of mortgages has been different, and the financial picture in the US has been much more stimulating. It is also clear that US data is hotter.
Is this really a new world?
Second, Macklem's speech addresses the possibility of supply shocks in the future. 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 that we may face more supply shocks than we have seen in the past.”
What he is saying here is that he is concerned about trade wars disrupting the supply of vital components and about natural disasters or droughts destroying factories or goods. I'm not entirely sure this is new but his comments suggest that the job of reacting to this will be to keep interest rates high to eliminate inflation. This is unwise, and if so, it would double the pain of these events.
Despite this, he listed “technological change” at the top of his list. This is obvious because there is a very real scenario where generative AI scans cause a massive increase in productivity but lead to high unemployment rates. I believe this will be the most deflationary episode since the Great Depression.
Add all this up, and the Canadian dollar is roughly about to end for the year, which should see USD/CAD rise above 1.41 as risks rise next year.
She talked about this in an interview today with BNNBloomberg: