Analysts: BoC must show restraint in its rate hikes

Too many increases too soon could harm the Canadian financial system in the long run, observers warn

Analysts: BoC must show restraint in its rate hikes

While the Bank of Canada’s rate hikes are more than justified by the current macroeconomic climate, policymakers should take care not to fall into the other extreme and introduce too many increases in too short of a period of time, according to market observers.

Among those calling for restraint is Ed Devlin, founder and managing partner of Devlin Capital, who said that the best step that the central bank can take at the moment is to approach its rate hikes in a circumspect manner.

“The market is now pricing an actual tightening, even though we’re still emerging from a pandemic, and we’re dealing with the outbreak of war in Europe. For me, this starts to smell like an overshoot,” Devlin said.

“I think you want to take every day’s price action with a bit of a grain of salt ... we could roll out of bed tomorrow and there’s been an offensive somewhere in Ukraine, and we’re back to where we started.”

Read more: Industry observers weigh in on the likely stronger BoC rate hikes this year

Devlin said that inflation trends, contrary to indicators of the annual rate remaining consistently higher than the central bank’s 1%-3% range for the foreseeable future, actually represent a reversal from the pre-pandemic direction.

“Since 2008, we’ve been missing our inflation target to the downside,” Devlin said. “I really worry about, you know, as we start to hike rates — if we take away the punch bowl too quickly, that we end up right back at zero interest rates a few years from now. I think that’s a pretty bad outcome.”