–BOC Governor: To Tighten Policy ‘In a Deliberate and Careful Way’
By Max Sato
(MaceNews) – Bank of Canada Governor Tiff Macklem said Thursday that he won’t rule out the possibility of the bank raising the policy interest rate by a faster pace of 50 basis points than its decision Wednesday to conduct the first hike by 25 basis points if the bank has to accelerate tightening to better fight a potentially crippling surge in consumer inflation.
“We are more concerned about upside risks to inflation than downside risks,” he said during the question-and-answer session after delivering a speech to CFA Society Toronto. “There is certainly considerable space to raise interest rates over the course of the year.”
“If we have to move more quickly, we are prepared to do that. So I’m not going to rule out a 50 basis point move in the future.”
The bank announced Wednesday that it 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.
The bank’s first interest rate hike since October 2018 is aimed at cooling Canada’s decades-high inflation rate and hot housing market by gradually removing extra monetary support (a total of 150 basis points in rate cuts in March 2020 plus asset purchases) that is no longer needed for a steady recovery from the pandemic-caused economic slump.
The Bank of Canada will tighten monetary policy carefully so that higher borrowing costs aimed at cooling off rising inflation would not hurt the ongoing economic recovery from the pandemic-hit slump, Macklem said in his speech.
In addition to the rate hike, “We will also be considering when to end the reinvestment phase of our large-scale asset purchases and allow our holdings of Government of Canada bonds to begin to shrink,” he said.
“The economy is now in a place where moving to a more normal setting for interest rates is appropriate,” Macklem said.
Giving recent strong GDP data, the economy should be able to stand higher interest rates, but the governor noted it will be a “significant adjustment,” and thus the bank intends to tighten policy “in a deliberate and careful way, being mindful of the impacts and monitoring the effects closely.”
“The bank is committed to returning inflation to the 2% target and keeping inflation expectations well anchored,” he said, repeating the official mantra.
Macklem repeated the official statement released Wednesday: “The timing and pace of further increases in the policy rate, and the start of QT (quantitative tightening), will be guided by the bank’s ongoing assessment of the economy and its commitment to achieving the 2% inflation target.”
Canada’s consumer inflation has surged well above the bank’s target range of 1% to 3%, hitting 5.1% in January. The Russian invasion of Ukraine is driving up international prices for energy and commodities, which “will put further upward pressure on inflation in Canada and around the world,” Macklem predicted.
All three of the core inflation measures have increased in recent months. “CPI-common, which is more related to inflation in services and less influenced by global supply disruptions, was only 2.3% in January,” the governor said. In contrast, CPI-median and CPI-trim, which have been more influenced by the prices of globally traded goods, were 3.3% and 4.0%, respectively.
“Setting aside the crisis in Ukraine, the surge in inflation we have seen since last spring largely reflects pandemic-related shifts in global supply and demand,” he said. “But this rise in inflation has been larger than we expected six months ago, and price increases have broadened.”
Canadian inflation is led by three key factors: the global shift toward goods and away from services during the pandemic, a broadening of price increases to everyday items like food and energy, the strength of the Canadian recovery and the overall balance between demand and supply, Macklem explained.
“The double whammy of higher demand and impaired supply has resulted in sharply higher prices for many goods,” he said. In January, goods price inflation in Canada was 7.2%. The last time it was that high was in January 1983, when overall inflation was 8.2%.
“As the pandemic recedes, we can expect consumers to shift back to spending more on services, and this should take some pressure off global demand for goods,” he predicted, but added that it is difficult to forecast how long it will take supply chains to normalize, and that the war in Ukraine is compounding this difficulty.
The three elements of the inflation story all weighed on the bank’s decision announced Wednesday, Macklem said.