— Adds governor comments from news conference, background at bottom
By Max Sato
(MaceNews) – Bank of Canada Governor Tiff Macklem on Wednesday stressed that the bank’s latest view that domestic interest rates are “on a rising path” does not mean that the bank’s policymakers would automatically keep raising rates once they embark on tightening.
“A rising path suggests … multiple increases,” Macklem told a question-and-answer session after delivering a speech to the Canadian Chamber of Commerce. “But I would stress that a rising path does not mean we are on an autopilot. We will take those decisions at each point.”
Housing demand will remain strong, backed by existing low borrowing costs, a rebound in immigration among other elements, but will gradually come off from a very elevated level, reflecting some normalization as the economy emerges from the pandemic and “the fact that interest rates will be on a rising path,” Macklem said.
He was asked about his remarks made at a news conference on Jan. 26 that the bank signaled clearly that Canadians should expect a path toward higher interest rates. “We are on a rising path,” he said at the time.
In its Jan. 26 policy announcement, the bank said it left its record-low policy rate — the target for overnight lending rates — at 0.25% to continue supporting economic recovery during the pandemic but also decided to end its promise to keep its super-low rate until a specific time, opening the way for an early rate hike this year.
Amid 5% inflation, well above the bank’s 2% target, and a robust economic recovery, the BOC is widely expected to start raising rates in its next policy decision scheduled on March 2, which would be its first hike since October 2018, to be followed by a few more increases this year.
The governor said a combination of vaccination and monetary and fiscal policy stimulus has been “very effective” in pulling the Canadian economy out of the pandemic-caused slump, and that the process of existing from quantitative easing “has gone relatively smoothly.”
“I hope that it is sometime before we have to use our exceptional tools again, but they are there, and if we need to use them again, we will,” he said.
The BOC ended its quantitative easing program in October and entered a reinvestment phase.
Later at a news conference, Macklem was asked about the timing of “quantitative tightening,” or the process of not replacing maturing bonds that the bank holds on its balance sheet.
He replied: “We are not actively contemplating outright sales of Government of Canada bonds, but once we lift off the policy rate, we will be considering exiting the reinvestment phase and allowing our balance sheet to shrink.”
The BOC adopted asset purchases “forcefully” to combat the headwind generated by the pandemic and the important phase of ending the exceptional stimulus program is “when the time is right, let the balance sheet move down and get back to more normal levels,” the governor told reporters, without giving any timeframes.
On the level of interest rates considered neutral to the economy, Macklem said it is hard to pinpoint the neural rate and that the bank will learn where it is as it tightens and monitors how the economy evolves. He noted the bank’s latest estimate is that the nominal neutral rate is 2.25%, the midpoint of the estimated range of 1.75% to 2.75%. It is reassessed annually and the next estimate will be published in the quarterly Monetary Policy Report in April.
“It’s even possible that for a time we will have to raise the interest rate above the neural rate to bring inflation back to target,” Macklem said. “On the other hand, if there is a new headwind emerging in the Canadian economy, maybe we don’t get all the way back to the neutral rate.”
“How much they (interest rates) need to move up and how fast and when they end up, those are decisions we take through time as we learn how the economy is reacting to those interest rate increases,” he said.
In response to the first wave of pandemic, the BOC slashed its policy interest rate from 1.75% to 0.25% by conducting three 50 basis point rate cuts in March 2020.
Contact this reporter: max@macenews.com
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