[MUSIC PLAYING] The Bank of Canada raising rates again, but it was a smaller hike than many were anticipating. Joining us now with his reaction, James Orlando, Senior Economist at TD Economics. James, great to have you here, particularly on a day like this. Let's just start with the big word, [INAUDIBLE].. Is this a pivot or a pivot to come? How do we read the smaller than expected-- Pivot, I think that's the operative word that we're looking for. Going into today, we heard from Tiff Macklem before talking about how now is not the time to be flexible in interest rates, how you need to focus on what's happening with inflation. Nothing has really changed to improve the inflation story since Tiff spoke last time, but what we saw today was that the Bank is now going from what's been happening with inflation, because inflation is very much a lagging data point, to what the future is looking like for the Canadian economy. And it's looking for very weak, stagnant growth from now right up until the end of 2024. So that's not looking very positive. And so as a result, the Bank of Canada is moving from this state of we need to keep hiking rates until things turn to we think things are going to turn. And we know that interest rates work with a lag. So as a result, we might be nearing the end of this hiking cycle. "Nearing the end," that does suggest that there are more hikes to come. But already, a hike that was less than expected. What are you thinking we get out of this Bank in the next couple of months? And if we are closer to the end, where is the end? Yeah. It's really interesting when you think about where we've come. So we started this year at pretty much zero interest rates. We've moved up to 3.75%. The Bank of Canada's likely going to get to at least 4%, maybe 4.25% at the next meeting. We think that's pretty much going to be the peak level of policy rate. We think that the impact of past rate hikes-- we think getting to that level of interest rates-- we've seen it in the real estate sector. We're starting to see it with the consumer right now. Remember, the consumer is the most important part of the Canadian economy, and we're starting to see consumer confidence wane. We're starting to see consumer spending starting to ease off. And when you have that, you know that that's going to result in weak demand going forward. That's going to cause below-trend growth. And that really is the precursor that we need to get inflation coming back down. So the Bank's going from what's been happening to what's going to happen, and what's going to happen is looking pretty bleak right now. Tiff Macklem, in his opening remarks before he took questions after the decision, it still sounds like they're trying to find that magical place where they can slow demand to the point where inflation starts to come down, but they don't throw the entire economy over a cliff into a deep recession. We've had conversations. I've had conversations with some of your colleagues in recent weeks, that it's been maybe a harder and harder mission to accomplish. Can they accomplish-- I mean, he still seems to have at least some sort of hope. Yeah. And they answered the question saying that we think that GDP growth is going to get pretty close to zero, so in positive territory. It could slip into negative. Whether that's a recession or not, we don't know. The idea of going to a soft landing is just that, that we go into this period of stagnation where demand is lessened. It's able to catch up with some of the supply that we have right now or the high-level supply. And then you're hoping that inflation comes down. That's the story that they're going with. How long they can keep doing that with higher and higher interest rates-- I think they're realizing that they're getting to that point with interest rates where, if they keep going, if they go to 5%, can they actually achieve that soft landing? I think they're starting to doubt that. And I think that's why they're starting to slow down the pace of rate hikes because they don't want the economy to go into recession. They don't want to have a severe contraction. And if you keep pushing on rates, eventually you're going to get to a point where like, OK, throw in the towel. We're going to be getting to this point. And so I think that's why you're seeing the rates slowing down, the pace of rate hikes right now. Now, when you get a smaller than expected rate hike, is it too much for some market participants? And I don't know their minds. But are they perhaps extrapolating what might happen next with the US Federal Reserve, with other central banks as they say, perhaps, we're sort of in the same inflationary boat together, even though we do have different economies? Yeah. You would think that what happens with the Bank of Canada isn't going to influence the Federal Reserve. Usually, we look south of the border. HOST: Maybe the other way around, right? Yeah. Usually we look south of the border for some guidance. Usually, it doesn't come in the opposite direction. But one thing to note is that, just last week, we've had some Fed members talk about that they're going to debate at the next meeting when peak policy rates are going to happen. So they're talking about it. Most central banks, when they get to what we call restrictive levels of policy, they know they're slowing demand. They know they're slowing growth. They know they're going to cause this tight labor market to loosen a little bit. And so they're realizing that, OK, 4% interest rates, maybe this is the end point for us. So it's not just the Bank of Canada. The Federal Reserve members are saying they're going to have this discussion at their next meeting. So whether or not they slow down pace of rate hikes as well, I think the Bank of Canada maybe opens the door for the Fed, but they're going to do what they think is right. And they're talking about doing the exact same thing the Bank of Canada did today. Imagine whether it's around the table at the Fed or the Bank of Canada, other central banks, they have to worry about legitimacy and the other end, that if they press pause a little too early, and they can't tamp down inflation, and they can't tamp down inflation expectations, then that would be just as big of an error as one would imagine on the other side of going too far. Yeah. And history tells us that that is something that has happened before. We saw it in the 1970s and '80s where interest rates rose. It slowed demand. You got inflation coming back down from double digits to about 5%. The central banks decided to pull off the rate hiking cycle. They started to ease policy. And then what did you get? You got another level up in inflation, causing interest rates to go even higher than they did in the previous time period. So you don't want that. You want to make sure that you raise interest rates, you lock in those higher interest rates, you convince people that they're going to be remaining high for quite a bit of time here, and then you actually cause demand to slow such that inflation slows. You get that inflation down. Once you're at that level, then you can think about easing policy. And that's more of a late 2023 story. It's not a right now story. HOST: I imagine, when it comes time to ease policy-- and you think that might be a late 2023 story-- that it would be slow and gradual. But then I think of the other side of this one. It was conventional wisdom, and I bought into it as well, saying, well, when it comes time to raise hikes, they're going to go slow and gradual because that's what central banks do. How much faith can we put on the other end about how those moves might look? Yeah. So generally what happens is when it comes to raising rates, central banks are pretty gradual when it happens because it's a shock to people. It's a shock to businesses. So you want to be a little bit more prescriptive when you do that sort of thing. Just ease tensions. Make sure that things don't fall off a cliff right away. But what we do know is that even in the past, when central banks have been easy with respect to raising rates, they've been very quick to cut rates. So they always say that you take the escalator up, and you take the elevator down when it comes to interest rates. And we think that's probably what's going to happen here because when the economy turns, it turns fast. And I think central banks need to react to that really quickly. We're just hoping that inflation, by that time that the economy is reacting very strongly, that inflation is down. And the central banks can be confident to cut interest rates and not do what you just mentioned before where they cut rates too early and have to raise them again.