MNI: BOC Says Economy Can Handle Deliberate Path of Rate Hikes

Bank of Canada Governor Tiff Macklem expects a deliberate path of interest-rate hikes to brake price expectations in an economy showing resilience through the pandemic, he said in a speech Thursday.

"The economy can handle it. We know this will be a significant adjustment, and we fully intend to tighten policy in a deliberate and careful way, being mindful of the impacts and monitoring the effects closely," Macklem said. The speech follows Wednesday's decision to raise the policy rate to 0.5% from a record low 0.25%, and Macklem holds a press conference around 12:45pm EST.

Ending the reinvestment of bond purchases "would be a natural next step," he said without giving a timeframe, and the Bank doesn't intend to actively sell bonds. The Bank has been holding CAD500 billion of assets on its books for months now after they grew to CAD575 billion from CAD125 billion under Canada's first QE program.

"Roughly 40% of our bond holdings mature within the next two years. This suggests that, other things being equal, our balance sheet would shrink relatively quickly," Macklem said. Shrinking the balance sheet would "complement" increases in the policy rate, which remains the chief tool, he said.

PATH OF TIGHTENING

"We are now clearly on a path to normalizing monetary policy," Macklem said, re-introducing the word "path" that he brought up in January and left out of Wednesday's rate decision statement.

Much of his speech outlined the run-up in consumer prices through the pandemic and how it's been broader and more persistent than expected as supply chains frayed and families stuck at home during the pandemic concentrated spending on say workout bikes instead of haircuts.

"We expect global demand and supply of goods to gradually come into better balance through 2022," Macklem said, adding that rate hikes mostly work on the demand side and can't unlock port congestion.

With Canada's economy back at full output, the upside inflation risks are more prominent and could be exacerbated by the Ukraine conflict as food and energy prices climb further, Macklem said.

UPSIDE INFLATION RISKS

"The lesson from history is that if inflation expectations become unmoored, it becomes much more costly to get inflation back to target," Macklem said. "So far, longer-term inflation expectations have remained well anchored, and Canadians can expect us to use our tools with determination to keep them that way."

Inflation was 5.1% in January versus the Bank's 2% target, and its own survey of companies shows worries prices will remain above 3% for at least another year. Some sources have told MNI the Bank must be cautious with hiking because of heavily indebted consumers.