MNI: BOC Says Significant Shift Needed to Restore 2% Inflation

Bank of Canada Governor Tiff Macklem said Wednesday a good deal of the country's nearly 5% inflation rate is caused by temporary global supply pressures, but stressed that dialing price gains all the way back to his 2% target requires a "significant shift" to a path of rate increases.

"The Bank’s Governing Council agreed that the economy will need higher interest rates to moderate growth in spending and bring demand in line with supply," Macklem said in the text of a speech, referencing deliberations behind the Jan. 26 decision. "If inflation expectations become unmoored, the costs of getting inflation back to target will be much higher. For both of these reasons, we signaled with unusual clarity that Canadians should expect a rising path for interest rates."

The comments largely mirror what Macklem said after the last rate decision and in parliamentary testimony shortly afterwards. The BOC held its key lending rate at a record low 0.25% last month, surprising some investors who called for a hike, and economists and market trading now both show strong confidence for a hike at the next decision March 2.

Canada's economy is "only just now getting back to full capacity" and unwinding global supply pressures should slow inflation to around 3% by the end of this year, Macklem said. That would still be at the top of the Bank's 1%-3% target band.

"At close to 5%, the current rate of inflation is too high. This is well above our 2% target," Macklem said.

CHIDING FIRMS TO INVEST

Most of his speech discussed the nation's lagging labor productivity relative to the U.S. and he challenged his hosts at the Canadian Chamber of Commerce to do better. Domestic firms have a history of investing less in workers and putting less money into lucrative industries than American counterparts, Macklem said.

Canada's economic recovery from the pandemic has also relied far more on hiring workers than stretching current employees with more hours, he said.

While there are signs Canadian firms intend major investments from here, "it’s imperative that businesses in Canada follow through on these plans or risk losing out to U.S. competitors," he said.

"Businesses must also be willing to pay up for talent, and that comes back to productivity -- higher productivity pays for higher wages."