Central banks took a lot of flack for being slow to hike interest rates as inflation took off. Now a CIBC economist says they should be wary of mistakes coming down the other side.

When prices started rising in late 2021, one of the the central banks’ biggest mistake was to treat “fluctuations in supply as if they were changes in demand,” said Andrew Grantham, senior economist at CIBC Capital Markets, rather than what occurred, which was demand following supply. That caused the Bank of Canada and others to initially misread the economy, ultimately leading them to label inflation as transitory when it was anything but.

Grantham said, in an end of year note, he feels for central bankers who were heavily criticized for that call and others.

“It has become fashionable in recent years to criticize central banks for their actions during and after the pandemic. However, in many cases this is an example of throwing stones in glass houses, as very few of those commentators pointed out the mistakes at the time,” he said.

Now the challenge is reversed, but the stakes are equally high.

Investors and consumers are already expecting a lot from central banks in 2024 in the form of extensive interest rate cuts — as much as 100 basis points for Canada and 75 in the United States, according to the latest projections from the United States Federal Reserve. Cuts of that magnitude could send stocks soaring even higher and provide financial relief to consumers with mortgages.

But Grantham warned the economic pictures are now different in the two countries, and that central bankers should respond accordingly.

Bank of Canada

After inflation registered at 3.1 per cent in November, Bank of Canada governor Tiff Macklem indicated that interest rates should now be high enough to drag the consumer price index back to the two per cent target range.

But Macklem has also been hesitant to open the door to rate cuts, with the bank adopting a still slightly hawkish tone in its rate decision statement on Dec. 6, which warned central bankers are prepared to hike again if inflation proves stubborn.

That could be a mistake, Grantham argued.

“A premature easing of interest rates should not be a concern, as household consumption has already slowed materially,” he said.

Canada’s economy has also decelerated. CIBC is forecasting annual GDP of 1.1 per cent for 2023 compared with 3.4 per cent last year, followed by 0.6 per cent in 2024.

Further, the economist said much of the remaining inflation is being driven by supply issues not demand — “notably the inability of housing supply to keep up with population growth.”

Therefore, the biggest risk for the Bank of Canada is that it hangs on to higher interest rates for too long “creating a prolonged period of sluggish economic activity and eventually below-target inflation by 2025.”

Federal Reserve

Fed chair Jerome Powell has the opposite problem.

“The Federal Reserve needs to avoid the temptation of cutting interest rates too early or quickly,” Grantham said.

Inflation could slow to two per cent in the summer, he said, but there is a danger that it re-accelerates if, as is currently the case, consumer demand remains strong south of the border.

Cutting rates too quickly could cause demand and inflation to pick up.

“Both central banks should be well aware of these risks, and if they stick to a New Year’s resolution of not overacting to supply-driven trends in growth and inflation we should see more interest rate cuts from the Bank of Canada in 2024 than the Federal Reserve,” Grantham said.

 Sign up here to get Posthaste delivered to your inbox.

Toronto home sales fell to a 13-year low in 2023 as higher mortgage rates kept buyers away, according to year-end figures from the Toronto Regional Real Estate Board.

Only 65,982 homes changed hands over the past 12 months, down 12 per cent from a year earlier and 45.7 per cent below a peak in sales recorded in 2021.

Benchmark and average home prices both declined in 2023, with the benchmark falling 0.41 per cent to $1,067,200 and average prices dropping 5.4 per cent to $1,126,604.

Read the full story from Shantae Campbell here.

• Today’s data: Canada releases jobs numbers for December with economists calling for the unemployment rate to rise to 5.9 per cent from 5.8 per cent in November. The United States Labor Department also releases December employment data. U.S. factory orders come out today.
• Earnings: Constellation Brands Inc.

Get all of today’s top breaking stories as they happen with the  Financial Post’s live news blog, highlighting the business headlines you need to know at a glance.

• FP Answers: I’m only 31 years old. Do I have to save and invest for retirement?
• Interest rate cuts, return to growth on economic horizon, Deloitte says
• Taxpayers’ strange excuses don’t sway courts after CRA denies CERB, CRB eligibility

The Canada Revenue Agency has been on a bit of a tear of late tracking down people who received pandemic-relief payments but might not have been eligible. In this week’s column, tax expert Jamie Golombek looks at two cases that went to court and the strange excuses people came up with. Taxpayers’ strange excuses don’t sway courts after CRA denies CERB, CRB eligibility

Today’s Posthaste was written by Gigi Suhanic, with additional reporting from The Canadian Press and Bloomberg.

Have a story idea, pitch, embargoed report, or a suggestion for this newsletter? Email us at posthaste@postmedia.com, or hit reply to send us a note.