MNI:BOC 'Focused On Taking The Steps Needed' To Restore 2% CPI

The Bank of Canada "remains focused on taking the steps needed to restore inflation to 2%," Deputy Governor Paul Beaudry said in a speech Thursday, one day after the central bank unexpectedly raised its policy interest rate to the highest since 2001. 

Beaudry's prepared text didn't give a direct view of whether the 4.75% benchmark would be lifted again at the next meeting on July 12, adding "we'll have more to say about all of this in our July forecast." He reiterated the quarter-point hike was made in response to "accumulated evidence" and the growing risk inflation could get stuck well above target. Officials were concerned about unexpected strength in consumer spending on goods and particularly demand for things like furniture that usually are more sensitive to higher borrowing costs, he said.

The rate hike brought the central bank off the sidelines after policymakers signaled the increase to 4.5% in January could be enough to restore price stability, a decision made at a time when the Federal Reserve and ECB were signaling more tightening was needed. Most economists who have updated their forecasts overnight see the Bank of Canada hiking another quarter point next month, extending the most aggressive campaign in decades.

"We know this tightening cycle has not been easy for many Canadians. But the alternative -- not controlling inflation -- would be far worse, particularly for people living on low or fixed incomes," Beaudry said. 

"The bottom line is there appears to be more momentum in demand than we expected," Beaudry said. His remarks will be followed by audience questions and a press conference. "The data since April have tipped the balance."

Beaudry's speech mainly focused on the potential for the global and Canadian economies to move into a new era of higher interest rates. Some of the forces pushing neutral interest rates down over the last quarter century could be easing up or unwinding, he said. Those downward pressures have included the rise in savings linked to aging Baby Boomers, the integration of China and other high-saving economies into the global marketplace, rising inequality that puts more money and savings into the hands of the rich, and surprisingly weak business investment. 

Canada's nominal neutral rate has remained in a band of 2% to 3% through the pandemic, Beaudry said, but that could change over time. "My overall argument today is that a base-case scenario where the real neutral rate remains broadly in its pre-pandemic range is possible, but the risks appear mostly tilted to the upside. In the Bank’s view, that makes it more likely that long-term real interest rates will remain elevated relative to their pre-pandemic levels than the opposite," he said.