No new rate hikes needed if economy performs as expected, says BoC Governor Tiff Macklem

Bank of Canada Governor Tiff Macklem said on Tuesday he does not expect to hike interest rates any further, reiterating that the central bank has entered a new phase in its years-long battle against inflation.

The central bank has hiked interest rates eight times since last March, taking its policy rate to 4.5 percent from 0.25 percent in the fastest monetary tightening cycle in a generation. After announcing a quarter-point hike in late January, the bank announced a “conditional pause” on further rate hikes.

“If fresh evidence accumulates that inflation is not falling in line with our forecast, we stand ready to raise our policy rate further,” Mr. Macklem told an audience in Quebec City on Tuesday, according to the English text of the speech. “But if the new data is broadly in line with our forecast and inflation falls as predicted, then we don’t need to raise rates any further.”

CPI inflation remains well above the bank’s 2 percent target, hitting an annualized rate of 6.3 percent in January. However, Mr Macklem highlighted the progress made in recent months. Oil prices have fallen significantly, and durable goods prices are stabilizing, and in some cases even falling, as supply chains improve and shipping costs fall.

“Our preferred measure of core inflation is stuck at around 5 percent. But previous three-month rates have fallen below 5 percent. This suggests that core inflation will moderate in the coming months,” Mr Macklem said.

The bank’s latest forecast shows annual inflation slowing to around 3 percent by mid-year and reaching 2.5 percent by the fourth quarter.

“A particular risk to the base-case forecast is that energy prices will push inflation back up,” Royce Mendes, head of macro strategy at Desjardins Capital Markets, wrote in a note to clients accompanying the speech.

“Yet the Bank of Canada chief seems quite comfortable sitting on the sidelines, even if his US counterpart is set to discuss the need for further monetary tightening south of the border.”

Much of Mr Macklem’s speech focused on how monetary policy works: that interest rate changes take time to fully impact economic growth and inflation. Rate hikes hit the housing market first, then depress consumer spending and business investment over time as debt servicing costs rise.

“It is typically 18 to 24 months before we see the full impact of changes in our daily rates. That is why politics must be future-oriented. In other words, we should not raise interest rates any further until inflation is back to 2 percent. Instead, we need to pause rate hikes before we slow down the economy and inflation too much. And that’s what we’re doing now,” said Mr. Macklem.

The bank expects Canada’s economy to falter in the first three quarters of 2023 as higher borrowing costs slow consumer spending. Mr. Macklem has said a mild recession is possible, although he has maintained he does not expect a major economic slowdown.

In Tuesday’s speech, he did not indicate that he was considering a rate cut. After the bank’s interest rate decision in January, he said it was far too early to talk about easing monetary policy.

Financial markets and many private sector economists expect the bank to start cutting interest rates later this year. A Bank of Canada poll of Bay Street analysts released Monday showed many expect the bank to cut interest rates by a quarter of a point in October and again in December.

Source: www.theglobeandmail.com