Ed Devlin joined BNN for an interview this morning to discuss expectations around the Bank of Canada’s interest rate decision tomorrow. He said that the key thing to watch and see if the Bank of Canada gives any clues about how they would respond to the emergence of persistent stagflation, and emphasized that crushing inflation should be the first priority. Ed continued by saying that we are in uncharted territory: we have unprecedented levels of debt, which led to increased sensitivity to the numerous recent rate hikes.
According to Ed, there is a limit as to how much monetary policy can diverge between Canada and the US, and continued US rate hikes might make it difficult for the Bank of Canada to pause hikes. He pointed out that while major central banks will be reluctant to give up their inflation fighting credibility, they have to be very sensitive to how sustained rate hikes will affect their highly indebted economies. Ed expressed that he hopes that the central banks will be able to switch gears quickly and bring rates down quickly once inflation is under control. He also disagreed with calls to raise inflation targets above their traditional two percent level, since the key is consistency and stability of expectations. Ed thinks a recession is likely coming and that equity markets might be overpriced, and suggested that government bonds might be the best option for investors at the moment.