MNI:BOC Balancing Risk Of Over-Tightening, CPI Target In Sight

Bank of Canada Governor Tiff Macklem on Thursday restored more balanced language about the risks of over- and under-tightening and said restoring inflation to the 2% target is within sight, adding a dovish note to Wednesday's hawkish interest rate hold.

Inflation progress has been slow and Macklem reiterated he's prepared to hike again if needed because of the risk that CPI becomes stuck above target. The Governor also rejected talk of raising the inflation target while noting the next five-year agreement with the government is due in 2026 and always requires careful study, comments made in a week where the Finance Minister said she would use all available tools to help ease the cost of living.

"With past interest rate increases still working their way through the economy, monetary policy may be sufficiently restrictive to restore price stability. However, Governing Council is concerned about the persistence of underlying inflation," Macklem said in the text of a speech from Calgary.

The Bank held its key rate at the highest since 2001 at 5% on Wednesday citing slowing growth while stressing policymakers could tighten again. A few economists expect the Bank to make an 11th hike at the next decision in October, while most say further weakness means rates have peaked for good this time following a pause that was broken with moves in June and July.

"Data since mid-July are providing clearer evidence that higher interest rates are moderating spending and re-balancing demand and supply in the economy. However, we remain concerned that overall inflationary pressures are persisting and larger-than-normal price increases remain broad-based across the goods and services Canadians buy regularly," Macklem said. He also said excess demand has diminished substantially even with a lagged response to rate hikes. 

In a week where provincial premiers criticized the Bank for squeezing households with tight monetary policy, Macklem said the June and July increases were "difficult decisions" and "we don't want this to be any harder than necessary."

While backing the current 2% inflation target Macklem said the next five-year review will tackle among other things major global challenges such as "demographic changes, rising geopolitical tensions, climate change and digitalization." That doesn't mean a higher target will be needed and the case for a higher goal now is even less convincing, he said. The target has been in place since 1995 and withstood other economic shifts he said, adding "you don't raise the target just because you missed it."

"Higher interest rates are painful. But getting to the 2% target is worth it. I want to be clear -- we are committed to the 2% target."

Inflation already climbed to 3.3% from 2.8% in the latest report to take it back outside the Bank's 1% to 3% target band. While inflation slowed from a peak of 8.1% it's been above the Bank's 2% target since March 2021 and in July officials pushed out their forecast of restoring the target until mid-2025. That's about the outer limit of the time over which a rate hike is seen having a drag on the economy.

Macklem will answer audience questions and hold a press conference after his remarks.