MNI: BOC Says Curbing CPI Will Take Time, Slower Growth Needed

Canada faces strong inflation pressure even as gasoline prices tumble and the economy needs a phase of slower growth to pull things back into balance, top central bank deputy Carolyn Rogers said the day after hiking 75bps.

"Getting inflation all the way back to 2% will take some time. We also know there could be bumps along the way," Rogers said in the text of a speech Thursday being given in Calgary. "Our primary focus will be to judge how monetary policy is working to slow demand, how fast supply challenges are resolved, and most importantly, how both inflation and inflation expectations respond."

The speech warned against complacency over the full journey back to the inflation target after the last CPI report slowed from 8.1% to 7.6%. Rogers made no mention of the Bank's past view tightening could stop just beyond the neutral rate seen from 2%-3%. The job market remains tight while slower Q2 growth masked strong investment and consumer spending, she also pointed out.

"While it looks like we might have seen the peak of overall inflation in Canada, inflation excluding gasoline prices has continued to rise and broaden across goods and services," Rogers said. "We need a period of lower growth to balance things out and bring demand back in line with supply."

Canadian firms are also seeing less progress when it comes to unclogging global supply chains than foreign peers, she said.

Governing Council discussed the risk of entrenched inflation before Wednesday's rate increase and that danger will rise the longer people expect elevated prices, Rogers said. "By front-loading interest rate increases now, we’re trying to avoid the need for even higher interest rates down the road and a more pronounced slowing of the economy."

The Bank hiked 100bps in July and today's 3.25% rate is the highest in the G7. Rogers didn't provide much detail on any terminal rate, while repeating that the highest borrowing cosince 2008 must rise even further. 

"Data over the past two months point in one direction -- the Canadian economy continues to operate in excess demand, despite the recent pullback in housing, and inflationary pressures are increasingly broad-based," Rogers said. The Bank's July projection said inflation may stay at around 8% for a few months and exceed the 2% target until the end of 2024, longer than its two-year horizon for restoring normalcy.

"Given the outlook for inflation, we continue to judge that the policy interest rate will need to rise further," Rogers said in an echo of the rate decision statement. "As the effects of tighter monetary policy work through the economy, we will be assessing how much higher interest rates need to go to return inflation to target."