MNI: BOC Dodges Talk of Rate Cut, Focused on Upside CPI Risk

Bank of Canada Governor Tiff Macklem said Tuesday he remains concerned about upside risks to inflation even though he’s likely finished hiking interest rates, making no reference to a potential cut that many investors predict late this year.

Macklem’s remarks in Quebec City, Quebec, kept the hawkish focus even as he underlined the economy will likely stall in the first three quarters of this year. He also made several references to his base case that 425bps of hikes were needed to slow today’s 6% inflation to 3% around midyear.

“We shouldn’t keep raising rates until inflation is back to 2%. Instead, we need to pause rate hikes before we slow the economy and inflation too much. And that is what we are doing now,” Macklem said.

The Bank raised its overnight rate to 4.5% last month and investors see the rate being cut once or twice late this year. Other officials including the Fed’s Jerome Powell have also pushed back against the idea of a 2023 cut with inflation so far above target.

Macklem remained confident inflation is moving back to 2%, saying even Canada’s hot job market may have peaked last year. Still, the unemployment rate remains close to a record low and some surveys of consumers and firms see inflation above the Bank’s 1%-3% range for several years.

Slower consumer spending has spread beyond products that are sensitive to higher interest rates, Macklem said, job vacancies are down from record highs and housing prices have tumbled 13%.

“For inflation to get back to 2%, supply needs to catch up with demand and services price inflation needs to cool. Wage growth will need to moderate alongside inflation expectations, and pricing behaviour normalize. If those things don’t happen, inflation won’t come back to our 2% target, and additional monetary tightening will be required,” he said.

The biggest upside risk is another jump in global energy prices, and inflation expectations could remain elevated, Macklem said. “Overall, we view the risks around our inflation forecast as balanced. But with inflation still well above our target, we continue to be more concerned about the upside risks.”