MNI: BOC Says Hikes Starting To Work, Long Way From CPI Goal

The Bank of Canada remains far from reaching its inflation goal and interest-rate hikes are just starting to show results cooling economic growth and price gains, Senior Deputy Governor Carolyn Rogers said Tuesday.

"We have a long way to go to get inflation back to target, but there are some early signs that monetary policy is working," Rogers told a student group. "Unfortunately, this adjustment is not without some pain."

"We don’t want this transition to be more difficult than it has to be," she said, "but higher interest rates in the short term will bring inflation down in the long term. Canadians are looking for ways to protect themselves from rising prices, and we are working to protect them from entrenched inflation."

Inflation has exceeded the Bank’s 2% target since March 2021 and officials say it won't return to that mark until the end of 2024. The Bank's latest quarterly survey showed consumers and firms have some price record expectations, such as about four in five executives seeing CPI topping 3% over the next two years.

Rogers didn't provide a view on the size of a hike at next month's meeting. Economists surveyed by MNI are split between another 50bp increase or a step back to a quarter point, following moves of 100bps and 75bps earlier this year. Much of her speech focused on increased risk of a setback among Canada's heavily indebted families or housing prices that in most markets climbed more than 50% in the past two years.

"The risk of a trigger that may affect financial stability has increased, as a result of high inflation and the response of increasing interest rates," along with fragility brought on by the Ukraine war, she said. Weakness in housing is to be expected as the Bank's rate climbed from near zero to 3.75% and in some ways is needed to pull back unsustainable gains, she said. Some mortgage borrowers are now facing monthly payments that cover only interest and make no move against the loan's principal. 

Canada's financial system-- which emerged mostly unscathed from the global crisis around 2008-- is well positioned again thanks to higher capital standards and a stress test on mortgage borrowers, Rogers said. Some of these vulnerabilities have been in place going back more than 15 years, she noted, though cautioning many Canadians have never lived through such a jump in borrowing costs.

Another important cushion is that Canada's economy will likely avoid a very hard landing, she said, referencing a common view that only a surge in unemployment would push many people out of their homes.

"We are not expecting a severe economic downturn with the kind of large job losses typical of past recessions," she said.