MNI: BOC Can Still Be Forceful With Hikes, More Data Dependent

The Bank of Canada can still be "forceful" with interest-rate hikes to slow overheated demand and inflation, Deputy Governor Sharon Kozicki said Thursday, raising the more hawkish prospect of repeating Wednesday's half-point increase at the next meeting in January.

"If we are surprised on the upside, we are still prepared to be forceful," Kozicki said in the text of a speech given in Montreal, echoing a word used earlier this year to signal bigger rate moves. "But we recognize that we have raised interest rates rapidly and that their effects are working their way through the economy. In other words, we are moving from how much to raise interest rates to whether to raise interest rates."

The speech elaborates on thinking behind the hike to 4.25% on Wednesday, where policy makers opted for the bigger move versus a market split between a half-point increase and a downshift to a quarter point. The Bank's decision also signaled the potential for a pause by dropping language saying further hikes were needed. Kozicki said the more balanced statement means "our decisions will be more data-dependent."

Recent figures have provided only early evidence that higher rates are doing enough to slow demand and that core inflation is fading, she said, also noting that tight supply chains still face major geopolitical disruptions.

"With the labour market still tight and businesses still finding it easy to raise their prices, Governing Council agreed that the economy still needs a more sustained moderation of demand," Kozicki said. Many economists see a mild recession early next year, and some union groups say the Bank's tightening campaign will bring needless job losses while doing little to tackle the root causes of rising prices.

Inflation reached a four-decade high of 8.1% in June and its downward trend has stalled at 6.9%. Kozicki said price trends remain sticky and the Bank must guard against entrenched increases. After the jump in the policy rate from 0.25% this year, it will take some time to bring inflation back to target, she said. The Bank's October prediction was 2% inflation returning at the end of 2024.

The deputy gave a balanced view of some of those price pressures. "On one hand, inflation remains too high, with many of the goods and services Canadians regularly buy showing large price increases. On the other hand, three-month rates of change in core inflation have come down, an early indicator that price pressures may be losing momentum," she said.

"The economy remains in excess demand, inflation is still too high and broadly based, and short-term inflation expectations remain elevated. That is why we made the decision we did yesterday," she said. "Governing Council will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target. We will continue to assess how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding."

Kozicki holds a press conference after her remarks. Today's speech isn't the last word for 2022, with Governor Tiff Macklem speaking in Vancouver next week.