Bank of Montreal CEO says rapid rate hikes needed to tame inflation as central banks walk a ‘tightrope’

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Bank of Montreal BMO-T chief executive officer Darryl White says central bankers have no choice but to raise interest rates quickly to tame inflation, but are walking “a tightrope” as mounting pressures on the global economy threaten to slow economic growth.

The Bank of Canada’s decision to raise its benchmark rate by half a percentage point on Wednesday was “good and necessary,” Mr. White said in an interview after BMO’s annual shareholder meeting, held in Toronto and online on Tuesday.

Central bankers around the world are seized with the challenge of reining in inflation, which in Canada reached its highest level in three decades in February, at 5.7 per cent.

That level of inflation is hard to slay, Mr. White said, meaning Canada will probably face “a pretty rapid pace of hikes” to interest rates over the coming months. “When you are at a 30-year high, this is an important fight to pick and I think it’s the right one.”

Yet that battle is also stoking fears over the impact higher rates may have on economic growth. Economies recovering from a global pandemic are already grappling with the fallout from the war in Ukraine, the latest resurgence of COVID-19 cases in many countries, continued supply chain problems, and tight labour markets that are driving up wages and leaving jobs unfilled.

“You put all that together and you say, wow, this is a bit of a tightrope, and it’s difficult to solve,” Mr. White said. “But I do think that if you’re in a central banker’s chair, there isn’t any choice at this point but to say, ‘all right, we’re going to do the best we can to tame inflation.’ ”

The oversized rate increase the Bank of Canada announced Wednesday should help start to cool inflation, Mr. White said. But with further rate increases expected to follow, higher borrowing costs are likely to begin eating into demand for some key banking products such as mortgages, where customers are already carrying heavy debts.

In the near term, economic signals are still solid. Unemployment hit its lowest level in 50 years in March, at 5.3 per cent; many consumers still have extra savings stashed away from the pandemic; and GDP is expected to grow by a healthy 4.2 per cent this year.

BMO has benefited from an economic rebound in Canada and the U.S., reporting strong financial results in recent quarters. And it used a large stockpile of extra capital amassed during the pandemic, when dividend increases and share buybacks were temporarily forbidden, to make a landmark $17-billion deal to acquire California-based Bank of the West, which Mr. White still expects will close this year.

Risks to banks are building, but “our base case remains constructive, and we believe that reports of a recession are greatly exaggerated,” Meny Grauman, an analyst at Scotia Capital Inc., said in a note to clients on Wednesday.

Looking a year to 18 months down the road, however, Mr. White said the economic picture “gets more uncertain.”

That is one reason why senior business leaders have been pressing Ottawa to shift focus to prioritize economic growth, productivity, business investment and spending restraint to cut down federal deficits. The budget presented last week “does represent a turn in the right direction from the government,” Mr. White said, showing greater attention to those priorities.

“If I were to pick on something, I would say if you consider an environment where inflation is at a 30-year high and unemployment is at a 50-year low, if there were ever a time for faster deficit-reduction plans, this feels like it could be it,” Mr. White said.

He also joined other senior bankers in criticizing a new two-part surtax on banks and insurers outlined in last week’s budget. Ottawa plans to raise $6.1-billion over five years by permanently increasing the corporate tax rate for many banks and insurers by 1.5 percentage points, and adding a one-time tax on 2021 profits that were propped up by government stimulus.

Mr. White said the taxes are “bad policy” that unfairly target bank shareholders, create distortions in markets and serve to discourage investments in Canada. “I’m not a fan of this part of the budget,” he said.

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