MNI: BOC "Prepared To Act Forcefully" To Curb Prices-Kozicki

The Bank of Canada will act "forcefully" if needed to slow inflation that's now about triple the 2% target, Deputy Governor Sharon Kozicki said Friday, including higher interest rates and a shift to paring down the balance sheet.

"We have taken action and will continue to do so to return inflation to target, and we are prepared to act forcefully," she said in the text of a speech, her first since joining the rate-setting panel last year. "The Bank has been clear that higher interest rates are needed to bring inflation sustainably back to the 2% target."

"I expect the pace and magnitude of interest rate increases and the start of QT to be active parts of our deliberations at our next decision in April," she said. "The reasons are straightforward: inflation in Canada is too high, labour markets are tight and there is considerable momentum in demand."

Governor Tiff Macklem said March 3 he wouldn't rule out a 50bp rate hike though his main message was a predictable "path" of tightening after the first hike in several years to 0.5% from a record low 0.25%. Kozicki's 'forcefully' comment also echoes a February speech by Deputy Tim Lane saying "we will be nimble -- and if necessary, forceful" as required, which was followed by the 25bp hike.

Global investors are betting the Fed could hike half a point at its next meeting in May and some BOE members recently voted for such a move. The BOC has shown it can make outsized moves, cutting three times by 50bp in March 2020 as the pandemic emerged. Economists predict the BOC will hike in quarter-points increments at most or all of its six remaining meetings this year, and some say there is a chance of a half-point move in the near future.

Statistics Canada said inflation reached 5.7% in February, the fastest since 1991 when the Bank adopted inflation targets, and Kozicki said inflation will top its January forecast as the Ukraine conflict drives up energy prices.

"A key concern for us is the broadening of price pressures — around two-thirds of the components in the consumer price index are now exhibiting inflation above 3%," she said. "Persistently elevated inflation increases the risk that longer-run inflation expectations could drift upward."

Kozicki also provided some caution about the path of rate hikes, noting heavily indebted households remain a concern even if many built up savings through the pandemic as government relief checks flowed. Tightening too early after slowdowns can also create lasting inequality as some people take longer to find jobs again, she told a San Francisco Fed conference, noting the FOMC has applied this knowledge into its recent actions.

The Bank of Canada's recent change to its mandate also brings in some of this thinking, she suggested, by tracking a wider range of job data and with a remit to seek higher employment within the scope of the inflation target. "For today, I’d just like to reinforce that our renewed agreement commits us to using a wide variety of data to assess what’s going on in the economy. And I’ll remind you that the current context is one of high inflation," Kozicki said.