MNI: BOC's Macklem Says Rates Heading Higher, No Pivot Seen

Bank of Canada Governor Tiff Macklem on Friday hammered home the message interest rates must keep rising to bring inflation back to target, saying there's still a narrow path to slowing down an overheated economy without a hard landing.

Inflation will remain well above target for a while and that builds the risk of entrenched higher long-term price expectations, which are much harder to bring in line, Macklem told reporters at IMF meetings in Washington.

"Further interest rate increases are warranted," he said, echoing the last decision to hike to the highest policy rate in the G7. It's too soon to figure out how much higher rates must go or how long they will stay elevated he said, noting at this point there's no real tradeoff between price stability and a tight job market.

"That trust that we are going to return inflation to target must be rewarded," Macklem said. Even if Wednesday's CPI report shows another slowdown, inflation will remain high and far from the 2% target, he said. The CPI reached 8.1% earlier this year and has slipped to 7%.

IMF CONSENSUS

The Governor said his views reflect a consensus at IMF meetings this week that curbing inflation is the top goal even as the global economy faces significant downside risks including the war in Ukraine. The cumulative effect of rate hikes has been mostly orderly so far and policy makers are aware there can be spillovers that may require the use of other tools to stabilize markets, he said.

"There was a mood of concern, together with a mood of resolve," he said of IMF talks. Global officials also see the need for coherence between monetary and fiscal policy, he said.

The BOC has hiked rates 300bps this year to 3.25% and is seen hiking at least another 50bps at the Oct. 26 decision. Macklem again noted that relative weakness in Canada's dollar against its U.S. counterpart means there could be even further work to do raising interest rates.

The Bank may mark down Canada's growth forecast in the next Monetary Policy Report published alongside the Oct. 26 rate decision, Macklem suggested. While the path to a soft landing is "narrowing," he said, there's room to slow growth without a recession. The IMF this week said Canada could tumble into a modest recession, echoing forecasts from RBC and Desjardins.

Investors have under-priced Macklem's resolve on inflation that sounds like former Fed chief Paul Volcker, former Volcker aide told MNI. (See: MNI INTERVIEW: BOC Is Sounding Like Volcker- Ex-Volcker Aide)