–Senior Deputy Governor: To Keep High Inflation from Becoming Entrenched
–Rogers: Some Early Signs of Rate Hikes Working, As in Housing Market Pullback
–Rogers: Canadian Economy Strong, Can Cool and Stay in Positive Territory
–Rogers: Higher Rates Are Adding Burden to Canadians but Need to Bring Inflation Down
By Max Sato
(MaceNews) – The Bank of Canada’s job to bring decades-high inflation down is not over yet and the bank’s policymakers will keep price pressures from becoming entrenched by front-loading interest rate hikes, Senior Deputy Governor Carolyn Rogers said Thursday.
“Given the outlook for inflation, we continue to judge that the policy interest rate will need to rise further,” she said in a speech, repeating the bank’s statement issued the day before when the bank conducted the fifth straight rate hike. “As the effects of tighter monetary policy work through the economy, we will be assessing how much higher interest rates need to go to return inflation to target.”
“We have a careful eye on many different things — we have a lot of work ahead of us, and we will not rest easy until we can get inflation back to target,” she concluded.
“We also know that, for many Canadians, higher rates are adding to the burden they are already facing with high inflation. But raising interest rates is necessary to bring inflation down,” Rogers said.
The bank on Wednesday raised its policy interest rate — the target for overnight lending rates — by 75 basis points to 3.25%, as widely expected, as part of its front-loading credit tightening drive to bring down four decade-high inflation. The move followed a rate hike by an unusually large 100 basis points (a full percentage point) in July for the biggest increase since 1998.
At a news conference after the speech, Rogers was asked why the bank decided to raise the key rate by 75 basis points, instead of 100 basis points.
She replied that the decision was based on three key factors: Inflation is high, inflation expectations remain elevated, and the economy is overheated.
“We have seen some early signs of monetary policy working,” she said. “There is a lag in monetary policy but there are certainly early indications.” The housing market, one of interest rate sensitive part of the economy, has seen some pullback, she added.
Second-quarter GDP growth was slower than expected but consumption and investment remain high, Rogers noted.
“In total, what we saw was a continuing pressure on inflation. We are not where we were in July but we are a long way from where we need to be,” she said, pointing to the slight progress that the bank is making.
The recent drop in gasoline prices helped ease overall consumer inflation but commodities in general remain volatile, she said.
After the July policy decision, the latest date showed that the annual consumer inflation rate in Canada had slowed to 7.6% in July from 8.1% in June due to a smaller year-on-year rise in gasoline prices. Excluding gasoline, however, the CPI rose 6.6% on year in July, up slightly from a 6.5% gain in June, as upward pressure on prices remained broad-based.
Rogers sought to reassure that the Canadian economy as a whole can withstand the impact of rising borrowing costs.
“The Canadian economy remains strong. We are at record low unemployment. We’ve got a million job vacancies available,” she told reporters. “We think there is room in the economy to cool it and stay in positive growth territory. That’s our base case.”
“We need a period of moderation on growth to let demand come down and supply come back up and rebalance the economy,” she said. “The bank still sees a path to soft-landing.”
She also noted that the path is “narrow” and the balancing process is “delicate.”
The bank’s policy rate, now at 3.25%, stands just above its latest estimate for the nominal neutral interest rate in a range of 2% to 3%.
Rogers said it is an estimated range and there is no magic formula. “We don’t have a target for interest rates. We have a target for inflation. That’s the target we are focused on and we are determined to get it back to 2%.”
Asked whether forceful action bigger than a conventional 25-basis point rate hike is still on the table or large-size hikes are over for the bank, Rogers said, “We will take the next decision with information we have in front of us at the time .… We will take the next decision when it comes.”
The bank’s next scheduled rate announcement is on Oct. 26, when it also releases its quarterly Monetary Policy Report with updated inflation and growth forecasts.
Asked about the tight labor markets and rising wages, Rogers said, “It’s not our job to provide advice on wage or price-setting.”
But she also said, “The scenario we are worried about is that Canadians look at the current rate of inflation, they think it is here to stay, they start incorporating that thinking into long-term decision-making.”
That sort of spiral or entrenchment “would be damaging to the economy,” she said. “We will be watching wages closely.” Supply and demand must come back in balance across the economy, particularly the labor market, which will take the pressure off wages, she added.
Earlier at the speech site, Rogers was asked why the Canadian dollar, which is seen as a resource currency, is not strengthening much on elevated energy and commodity prices. She replied that the bank does forecast currencies but added that it “would be nice” to have the buffer effect on inflation that tends to be generated by the appreciation of the currency.
Normally when interest rates rise, it draws some investment into Canada, she said, “and you will see the Canadian dollar pick up and it would provide an important buffer on inflation. We haven’t had that buffer.”
“I was reading some commentary yesterday there is an expectation for the Canadian dollar to go up. We will see if that happens. It would be nice to get that buffer,” she told the audience.
In her prepared remarks, Rogers said the bank’s policymakers will closely watch whether higher interest rates are helping slow demand. If consumer spending moderates and labour demand eases, pressure on prices should decline, she said.
“However, we know Canadians have accumulated extra savings during the pandemic, so there is a risk that consumer spending has more momentum than we expect, making inflation more persistent,” she warned.
The bank will also monitor whether global supply disruptions are improving and if so, how fast the improvement will be translated into lower costs for Canadian businesses.
“On the supply side, unexpected global events could further disrupt supply and push prices up even more,” Rogers said.
Most importantly, the bank will pay close attention to whether inflation and inflation expectations are coming back down, she said.
The process of monitoring the development on the prince front “includes looking at the near-term momentum, in particular that of our measures of core inflation, to assess how broad and entrenched pricing pressures are.”
“Meanwhile, survey results will help us see if the short-term inflation expectations of consumers and firms are coming back down,” she said. “This will be an important sign that monetary policy is working and that Canadians are beginning to feel some relief.”
While monitoring how rate hikes are working through various economic indicators as well as surveys conducted by the bank and the private sector “to get real-time feedback,” the bank’s focus remains on inflation and “we are going to get inflation back to 2%,” Rogers said in response to questions from the audience at Calgary Economic Development.
“The best way to get inflation expectations down is to get inflation down,” Rogers said in a reply to questions. It can take up to two years for monetary policy action to have full effects on the economy, she said.
The bank is using its social media campaign to reach out to all Canadians to provide information on how it is conducting monetary policy, she said.