I think the U.S. Fed rate hike is very sensible, although a bit late: David Dodge
Former Bank of Canada Governor David Dodge says he’s less concerned about the size of interest rate hikes coming from North American central bankers – as long as rates return to neutral in short order.
“I think it's been quite clear that central banks need to get up to neutral in North America quickly to make up for lost time in 2021,” Dodge, who is also a senior advisor at Bennett Jones LLP, told BNN Bloomberg on Thursday. Dodge served as Canada’s top central banker from 2001 to 2008.
“Whether they're going by 50 [basis] points, 75 [basis] points, or even making a full-point move really isn't so much the issue. The issue is to get it up quickly and to signal to the world that they are getting it up to neutral.”
There are growing expectations on Bay Street that the Bank of Canada will follow in the footsteps of the U.S. Federal Reserve and deliver a three-quarter point interest rate hike at its next meeting on July 13 to get monetary policy back to neutral.
The so-called neutral level for interest rates is said to be a level for monetary policy where it’s no longer accommodative nor restrictive. The Bank of Canada estimates the neutral rate is between two and three per cent. Currently, the policy rate stands at 1.50 per cent.
Dodge said once North American interest rates return to neutral, central bankers can then reassess the direction of rates beyond that, depending on global economic conditions.
“No one knows how events in the world are going to play out. This is a very, very uncertain time. What is clear is we need to get policy up to being no longer accommodative, or being very mildly restrictionary. You need to get there. How far you need to go beyond that -- events are going to tell,” Dodge said.
He also called the U.S. Fed’s supersized rate hike on Wednesday “very sensible,” if not “a little late”.
Investors have flocked to the U.S. dollar as a safe haven asset amid rising rates, putting pressure on the loonie. The Canadian dollar currently trades around 77-cents U.S., a decline from the roughly 80-cents U.S. it was hovering around earlier this year.
The weaker Canadian dollar definitely plays into the Bank of Canada’s thinking, according to Dodge.
“Of course it does. Because at least in the medium term, the price of imported goods in this country are an important contribution to the movement in the aggregate level of prices. So yeah, of course it does,” he said.