By Max Sato
(MaceNews) – Bank of Canada Deputy Governor Sharon Kozicki on Friday stressed that the bank’s is determined to fight inflation with more actions “forcefully,” following its first rate hike in over three years in March, and ahead of its April 13 policy decision.
“We have taken action and will continue to do so to return inflation to target, and we are prepared to act forcefully,” she said in a webcast speech at a macroeconomics and monetary policy conference hosted by the Federal Reserve Bank of San Francisco.
Kozicki stressed that returning inflation to the 2% target is the bank’s “primary focus and unwavering commitment.”
“I expect the pace and magnitude of interest rate increases and the start of QT (quantitative tightening) to be active parts of our deliberations at our next decision in April,” Kozicki said, noting that inflation in Canada is “too high,” labour markets are “tight” and there is “considerable” momentum in demand.
She didn’t say when the bank’s Governing Council should end the reinvestment phase and allow its holdings of Government of Canada bonds to begin to shrink.
On March 2, the BOC raised its policy rate – the target for overnight lending rates – to 0.50% from its record low 0.25%, to keep high inflation from hurting economic growth, but decided to maintain the level of assets on its balance sheet by reinvesting in government bonds amid uncertainty caused by the Ukraine situation.
A day later, Governor Tiff Macklem said he wouldn’t rule out the possibility of the bank raising the policy interest rate by a faster pace of 50 basis points if the bank had to accelerate tightening to better fight a potentially crippling surge in consumer inflation. He repeated the official statement that the timing and pace of further increases in the policy rate, and the start of QT, will be “guided by the bank’s ongoing assessment of the economy and its commitment to achieving the 2% inflation target.”
The invasion of Ukraine has caused global prices for oil and other commodities to surge, adding to inflationary pressures around the world and in Canada, Kozicki noted.
She forecast that near-term inflation in Canada is expected to be higher than the BOC’s projections published in January. In its quarterly Monetary Policy Report, the bank projected that the annual rate will remain close to 5% over the first half of 2022 before declining to around 2.2% by the second half of 2023 and remain close to the bank’s 2% target in 2024.
Canadian consumer prices rose 1.0% on the month in February, the fastest pace since 2013, lifting the annual rate to a fresh three-decade high of 5.7%, up from 5.1% in January. It was the largest gain since August 1991, when the CPI rose 6.0%. February marked the second consecutive month where headline inflation exceeded 5%.
“A key concern for us is the broadening of price pressures – around two-thirds of the components in the consumer price index are now exhibiting inflation above 3%,” she warned. “Persistently elevated inflation increases the risk that longer-run inflation expectations could drift upward.”
A former vice president and economist at the Federal Reserve Bank of Kansas City, Kozicki focused on “large and uneven effects” of the pandemic on employment in her speech, and emphasized the need to grasp how differences among households affect economic outcomes, the health of the financial system and the transmission of monetary policy.
“With everyday items such as gas and groceries facing some of the fastest price gains, all households are affected by high inflation,” Kozicki said. “But my colleagues and I are mindful that this is especially painful for those with low incomes, because they tend to spend a greater share of their earnings on such items.”
She said BOC officials are “using new ways to collect and analyze data, digging into the experiences of a wide range of households and businesses as well as examining national figures.”
Through this analysis process, the bank is convinced that its current primary concern is high inflation, Kozicki concluded, indicating that the economy can withstand monetary policy tightening.
“Now, employment has recovered and labour market conditions are increasingly tight. And although household debt is still elevated, policy supports and increased savings have helped bolster households’ financial positions across income groups,” she said.