MNI: BOC Won't Rule Out Bigger Hike After Last Week's 50BPS

Bank of Canada Governor Tiff Macklem told reporters Thursday he won't rule anything out when asked about following up last week's half-point rate hike with something even bigger.

"I've used the wording that we need to normalize monetary policy reasonably quickly, and we're prepared to be as forceful as needed, and I'm really going to let those words speak for themselves,” he said. Last week's 50bp rate increase was already "an unusual step" that hadn't been taken in two decades and "Canadians should expect further increases in interest rates," he said.

Economists at Scotiabank and National Bank Financial have said today's inflation of 6.7%, the fastest since inflation targets were adopted in 1991 and more than triple the 2% target, justify more aggressive action such as a 75bp move. The Bank hasn't hiked more than 50bps since 1998 when it raised rates by a full percentage point to 6% in a bid to aid a falling currency, a practice it gave up soon afterwards.

Inflation has been surprisingly persistent amid supply chain woes and there are ongoing risks from the Ukraine war and China's Covid policies, Macklem said. This era is the biggest shock Canada has faced since inflation targets were adopted, though the Bank's track record of returning price gains to target will be helpful, he said.

Interest rates may need to move above neutral for a time if that's what's required, Macklem said during a briefing with reporters while attending IMF meetings in Washington. There is no preset path for rates and even though the economy has good momentum, there could also be a pause in tightening at some point. The Bank's forecast remains for supply chains to unlock and slow inflation later this year and for the economy to avoid a hard landing, he said.

Keeping inflation expectations in check is paramount, Macklem said. “If we let them become unmoored then inflation will just get stuck at a new higher spot and we really will have to slow down the economy a lot to get inflation back to target; that will be much more painful. And one of the reasons why we did move 50 last week really reflects the importance of keeping those inflation expectations well anchored,” he said.

“We do need to normalize monetary policy reasonably quickly,” he said. “There’s some more steps to go; as we get up closer to neutral we'll see where we are and I think after that, we'll have to be a bit more humble.”